Alice Haine, head of personal finance, Hargreaves Lansdown: “The Inheritance Tax (IHT) net is tightening as frozen nil rate bands continue to collide with rising property prices and investment values. The result is that a higher proportion of deaths are resulting in an inheritance tax bill, while a larger share of wealth within those estates is exposed to the levy.
Inheritance tax receipts reached a record £7.03 billion in 2023-24 and the proportion of deaths resulting in an IHT charge climbed to 4.72%, highlighting the powerful effect of fiscal drag. IHT still affects a minority of estates, and the number of estates caught by the tax dropped in 2023-24 – down 3.6% on the previous year - though the decrease may only be temporary as this dataset predates the IHT changes introduced by former Chancellor Rachel Reeves at the Autumn 2024 Budget.
The nil-rate band has remained frozen at £325,000 since 2009, while the residence nil-rate band has been fixed at £175,000 since 2020-21. With both bands now set to remain unchanged until 2031, the real value of these thresholds will erode over time. It means more estates are likely to drift into taxable territory even where there has been little change in a family’s underlying wealth.
The threshold freeze is already cutting deep, but this could be just a taster of the IHT pain to come. Plans to bring unused defined contribution pension assets within the scope of inheritance tax from April 2027, alongside significant changes to business and agricultural property relief, will undoubtedly have an impact.
The IHT reforms to agricultural property relief (APR) and Business Property Relief (BPR) that took effect in April are already increasing the amount of wealth potentially exposed to tax. Meanwhile, imposing IHT on unused DC pension assets from next April brings a longstanding estate planning advantage for many families to an end.
The combination of policy change, asset growth, frozen thresholds and a widening tax base will accelerate the inheritance tax take considerably in the years to come and families that fail to plan ahead could find themselves facing an unexpectedly large tax bill. In many parts of the country, it doesn't take vast wealth to create a potential inheritance tax liability. A family home, combined with a modest investment portfolio, can easily push estate values beyond £1 million – the IHT-free threshold for a beneficiary inheriting from married parents - which helps explain why the more affluent areas of London and the South East continue to account for the highest proportion of inheritance tax-paying estates.
For now, inheritance tax is predominantly paid by those with significant accumulated wealth rather than the average family, but that will change in the future. Families must remember there are solutions to mitigate an inheritance tax liability. With the average effective tax rate paid by taxpaying estates in the 2023-24 tax year coming in at 13% - significantly lower than the headline marginal rate of 40%, the data demonstrates the importance of taking advantage of available exemptions and reliefs.
Being married, for example, remains a key tax advantage with the largest exemption applied to transfers between spouses and civil partners. After the spousal exemption, the next greatest protection against IHT was taken through business and agricultural property reliefs – with the combined value of relief claimed coming in at £5.96bn, up 13% on the £0.68bn in the previous tax year – though relief limits introduced since April are likely to propel that figure even higher in the coming years.
The planned inclusion of pensions within inheritance tax calculations from April 2027 has already radically shifted estate planning. In the past, many carefully preserved pension wealth both to support later-life spending needs and to provide a legacy for loved ones. The new rules have substantially altered those plans, with more retirees choosing to gift and spend their pensions rather than preserve their pension wealth until their final years. Research from Hargreaves Lansdown has found that nearly one in four people plan to gift their pension tax-free cash to loved ones to reduce their inheritance tax liability.
That said, the Government’s proposal to reform social care may alter the retirement landscape once again. While Britain urgently needs a sustainable solution for social care, how that will be funded and the potential impact on retirement saving over the long term, remains unclear at this stage.
For now, those approaching retirement, or already in later life, must first consider whether their beneficiaries could be in the frame for an inheritance tax bill, and then explore what steps they can do to reduce that burden.
The key message is that inheritance tax planning should not be left until it's too late. Families concerned about the potential impact of inheritance tax should review their circumstances early, consider whether gifting strategies are appropriate, ensure wills remain up to date and explore the role whole-of-life insurance or trust arrangements could play in meeting future liabilities.
However, estate planning is a balancing act. The greatest mistake can be giving away too much wealth too soon and jeopardising your own financial security in retirement. With people living longer, it's vital that any inheritance tax strategy ensures sufficient resources remain available to support your own needs first. Given the complexity of the rules and the significant sums involved, professional financial advice can be invaluable in helping families strike the right balance between protecting wealth and maintaining long-term financial security.”
The government has released the Annual Inheritance Tax liability statistics for 2023-24
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