Inheritance tax (IHT) takings soared by billions of pounds in five months as frozen thresholds dragged more families into the net.
In the five months from April to September, HM Revenue and Customs (HMRC) received a staggering £3.7billion in IHT receipts – an increase of £200million compared to the same period the year before. The tax-free (nil-rate) threshold has been frozen at £325,000 since 2009 despite soaring house prices and inflation, and it is set to remain until 2030. With the planned inclusion of pensions in people’s taxable estates from 2027, the Office of Budget Responsibility (OBR) forecasts annual receipts to surge to a staggering £9.7billion in five years.
Nicholas Hyett, investment manager at Wealth Club, said: “Inheritance tax continues to be a cash cow for HMRC. While wealth taxes, IHT’s uglier sibling, will be in the spotlight in the run-up to the autumn Budget, it wouldn’t be entirely surprising to see further tinkering with IHT too.
« As things stand, inheritance tax may only affect around one in 20 estates, but that number is on the increase as an ever greater number of estates become liable for the most hated of taxes.”
Mr Hyett noted that years of freezes in thresholds, combined with increasing house prices and rising inflation, have pushed more families who might not consider themselves to be wealthy and would not historically have qualified for the tax, over the threshold.
He continued: “The current inheritance tax allowance has been frozen at £325,000 for 16 years, and remains frozen until 2030. The £175,000 residence nil rate band hasn’t changed since 2020.
“These freezes are a stealth tax, which allows the government to increase their take without a backlash from a headline-grabbing tax hike, but still contribute to the highest tax burden in 70 years.”
Several new inheritance tax reforms will be enforced over the next two years, which means even more families risk being dragged into the tax net.
Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, added: “Without action on the part of families, the steady increase in estates and assets liable for IHT due to asset growth could turn into a surge once those rule changes go live.
“The inclusion of defined contribution pension pots in estates from April 2027 has attracted most attention, with its potential impact on any household with pension assets, but the dilution of business and agricultural property reliefs from April 2026 comes first and will significantly expand the scope of taxable wealth – not just in the well-publicised case of farms but much more widely across quite modest family businesses of all sorts.”
From April 2026, Agricultural and Business Property Relief, which previously offered a full exemption for certain assets, will now only cover the first £1million, with any amount above this taxed at a reduced relief rate of 50%, effectively imposing a 20% tax.
Mr Dyall added: “The rise in receipts is not just a fiscal story, it’s a wake-up call. Many households are sleepwalking into substantial tax bills.”
Make or check your Will
Creating or updating a Will is a “huge step” in securing financial peace of mind, according to Mr Dyall. He recommended working with a solicitor and a financial planner to avoid unnecessary stress or disputes for estate administrators and beneficiaries, potentially saving on inheritance tax bills.
Wills are essential for unmarried couples, as the rules of intestacy can lead to assets being distributed in ways that might not align with your wishes.. Mr Dyall added: “For families with businesses or farms, recent changes to business and agricultural property relief mean traditional mirror Wills for married couples may no longer be the best strategy.”
The £1million Business Relief band cannot be transferred to a surviving spouse, which could result in lost tax benefits. Redirecting assets to children or a trust may lead to “significant” tax savings.
It is also vital to regularly review existing Wills to reflect current wishes and new tax rules. Additionally, consider establishing a lasting power of attorney (LPA) if you want to empower trusted individuals to act on your behalf when needed.
Gift or spend
With rising inheritance tax (IHT) liabilities, people should reconsider their wealth management strategy, especially as pensions become taxable and asset values rise. Mr Dyall said: “Give away more wealth during your lifetime to shrink the estate so that less of it is taxable at death.”
At present, individuals can give cash or items of any value. However, for the gift to be exempt from inheritance tax, the recipient must survive for seven years after receiving it.
Each person is allowed to gift up to £3,000 per tax year without triggering the seven-year rule. Married couples or civil partners can gift up to £6,000 together, or even £12,000 if they did not use their £3,000 allowance in the previous year.
In addition, individuals can give small gifts of up to £250 and gifts made from excess income to anyone without incurring inheritance tax. People can also make gifts ranging from £1,000 to £5,000 (depending on their relationship to the recipient) for weddings or civil partnerships.
People also have the option to gift « excess income » beyond the £3,000 limit, provided these gifts are made regularly, the donor intends to continue making them, and they can demonstrate that the money is not necessary to support their lifestyle. There is no set limit for these gifts, as it depends on the individual’s income and personal circumstances.
While gifting wealth is a common strategy, the rules are complex, so avoid impulsive decisions and work out a longer-term gifting plan with professional guidance.
Pensions
With changes to IHT rules, retirees may need to rethink how they manage pension pots to avoid creating or worsening tax liabilities. Mr Dyall warned that pensions could be “double-taxed” if the holder dies at 75 or older, with beneficiaries facing income tax on withdrawals already subject to IHT at 40%.
For higher-rate taxpayers, this could result in an effective tax rate of 67%.
To avoid this, retirees might consider drawing down pensions more quickly around age 75 or accelerating withdrawals of the 25% tax-free lump sum for spending or gifting, starting the seven-year clock for tax exemption.
Mr Dyall added that gifting from regular pension withdrawals could be a strategy, but cautioned: “If you are trying to use the excess income exemption, what you can’t do is take all your tax-free cash, stick it in a bank account and gift it gradually from there, as then it will be seen as a gift from capital and not from income.”
