Inheritance tax receipts jump 5%, as loved ones pay £190m more

Inheritance tax receipts have been on a one-way trajectory in recent years as rising asset values and frozen tax-free allowances leave families at the mercy of fiscal drag.

Families have paid £3.7 billion in inheritance tax so far this tax year (April-August) – £190 million more than the same period a year ago, equivalent to a 5% jump.

Policy changes mean the government is likely to raise even more from the tax in the coming years.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Inherited pension pots will be brought inside the inheritance tax net from April 2027 following changes announced in the 2024 Autumn Budget.

Agricultural and business property relief will also be halved on assets above £1 million from April 2026, leaving many farms and family businesses exposed to the tax.

Chancellor Rachel Reeves also extended the freeze on nil-rate bands from 2028 to 2030, meaning more estates will be dragged into paying the tax for the first time.

“The rise in receipts is not just a fiscal story, it’s a wake-up call,” said Ian Dyall, head of estate planning at wealth management firm Evelyn Partners. “Many households are sleepwalking into substantial tax bills.”

There are steps you can take to reduce your inheritance tax bill, but it is important to think holistically about strategies like lifetime gifts, including whether you can afford it.

“Families should remember that estate planning is not just about tax efficiency, it’s also about ensuring that wealth is passed on in a way that meets the family’s objectives and avoids unnecessary financial stress for beneficiaries, while in some cases preserving business continuity,” Dyall said.

Frozen inheritance tax thresholds

Under current rules, you can pass on an estate worth up to £325,000 before an inheritance tax bill is due, with an additional £175,000 allowance for those leaving the family home to their children or grandchildren (although this is tapered once estates exceed £2 million). Married couples can combine their allowances.

These allowances are known as the regular and residential nil-rate bands.

The £325,000 allowance has been at this level since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020.

Since April 2020, when the residential nil-rate band was last increased, average UK house prices have increased by more than 27%, according to Land Registry data.

Meanwhile, the Bank of England’s inflation calculator suggests that assets valued at £325,000 in 2009 (when the regular nil-rate band was last increased) could be priced at more than £523,000 today.

This suggests the regular nil-rate band is worth around 62% of its original value.

“These freezes are a stealth tax, which allows the government to increase its take without backlash from a headline-grabbing tax hike, but it still contributes to the highest tax burden in 70 years,” said Nicholas Hyett, investment manager at Wealth Club, the investment service.

Will inheritance tax rise in the Autumn Budget?

Taxes are likely to rise in the Autumn Budget on 26 November, as analysts warn that Reeves’s £9.9 billion fiscal headroom may have morphed into a £20 billion shortfall.

Rumours have been swirling, with reports that Reeves could look at tightening inheritance tax rules. This could include introducing a cap on the total value of lifetime gifts, or changing the rules on taper relief.

Under current rules, you can give away as much wealth as you like during your lifetime without generating an inheritance tax bill, provided you outlive the transfer by seven years.

If you die before the seven years are up, but survive for more than three years after making the transfer, you qualify for a reduced rate of inheritance tax under taper relief rules.

“Questions around the future of inheritance tax could encourage people to consider giving gifts during their lifetime while they know where they stand,” said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown.

“However, it’s absolutely vital not to give money away that you can’t afford to part with,” she added. “As you get older, your spending needs are likely to change, and some people will need to pay for care, which can have a profound impact on their finances.”

Those who are in a position to make lifetime gifts can take advantage of the £3,000 annual gifting allowance. The seven year rule does not apply to these gifts – but note that the £3,000 limit is the annual total, not the allowance per gift.

“There’s a separate rule that means you can give away surplus income inheritance-tax free too,” Coles said. “You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.”