Inheritance Tax take continues to grow

Andrew Tully, technical services director at Nucleus, said: “IHT receipts have grown by more than 50 per cent over the last five years, a trend that is predicted to continue and accelerate. This is due to the freezing of nil rate bands until April 2031, rising UK property values, and planned reductions to agricultural and business reliefs from April 2026.

“Although the impact of the agricultural and business relief changes has recently been eased with the increase in the 100 per cent relief threshold to £2.5m, rather than the previously announced £1m.

“The Government is also proceeding with its plans to include pensions within IHT from 6 April 2027. This will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC. But it will drive further strong growth in IHT receipts after 2027.

“There is still time for the Government to consider alternative options which increase its tax take on wealthier people passing on pension wealth, while avoiding the numerous problems created by bringing pensions into IHT. However, it’s looking increasingly likely it will stubbornly stick with its current complex proposals.

“Taken together all of this is likely to make IHT a more relevant issue for many more families within the next five years. Advisers can help clients mitigate these taxes by setting up trusts and making use of gift allowances and the spousal exemption.”

Isaac Stell, investment manager at Wealth Club, said: “The government has made a pig’s ear of inheritance tax reform. Crackdowns on farmers and business owners proved unpopular and ultimately unworkable, forcing a partial retreat on relief thresholds. But years of frozen allowances, combined with new rules that will bring pensions into the scope of IHT, mean more ordinary families, not just the wealthy, are being pulled into the tax net.

“At the same time, HMRC’s tougher enforcement is adding further pressure at what is already a difficult time for bereaved families. With the tax base widening and sharp ‘cliff edges’ in the relief system still in place, proactive planning and accurate reporting have never been more important.

“Recent reporting also highlights growing public frustration that inheritance tax is increasingly affecting middle income households, particularly those whose main wealth is tied up in their home or retirement savings. Frozen thresholds, set against steadily rising asset values, mean many people who would not consider themselves wealthy are now facing significant tax bills.

“Meanwhile, HMRC investigations are increasing. More than 14,000 bereaved families have been investigated for potentially underpaid inheritance tax since 2022–23, with the number of cases this year running well ahead of last year. These inquiries which are often prompted by data matching and valuation checks can last months or even years, and may result in additional tax, interest and penalties.

“Taken together, rising asset values, static allowances and expanded reporting requirements are creating a situation where estates that previously fell outside the IHT net are now becoming liable, leaving many middle-class families caught off guard.

What can families and investors do to mitigate their inheritance tax exposure?

Despite tighter rules and increased enforcement, tax-efficient estate planning remains possible, though it now demands earlier, more detailed planning, says Stell:

• Gifting early and carefully: Gifts from surplus income are immediately exempt; larger gifts fall outside the estate if the donor survives for at least seven years, but risk losing control of those assets.
• Business Property Relief (BPR) and qualifying investments: Planning around the £2.5 million full relief allowance and understanding effective tax rates on excess assets is critical.
• AIM ISAs and other relief-eligible holdings: While traditional ISAs still form part of the estate for IHT purposes, investing through vehicles that may qualify for relief requires professional risk assessment.
• Revisiting pension strategies: With pension IHT changes looming, serious consideration of how death benefits are held and passed on has become imperative.