Understanding the rising impact of Inheritance Tax

The amount of Inheritance Tax (IHT) paid by families has dramatically increased over the past decade. According to the Office for Budget Responsibility (OBR), IHT receipts are projected to reach £8.3 billion in 2024/25, increasing to £13.9 billion in 2029/30.

The increase is largely a result of rising asset values, unchanged IHT thresholds, and many families neglecting the tax planning opportunities available.

Independent Financial Adviser, Jason Lloyd comments:

“The government’s increasing reliance on ‘fiscal drag’ – where frozen thresholds have left taxpayers paying more – has boosted tax revenues without political fallout, but with IHT thresholds set to rise in April 2030, taxpayers can finally look forward to some welcome relief.”

In part 1 of our Inheritance Tax blog series, we explore strategies to protect your family’s financial future.

What is Inheritance Tax (IHT)?

IHT is a tax levied on the transfer of wealth, typically paid by the estate of a deceased individual, but it can also apply during a person’s lifetime. Your estate includes all property, money, possessions, and other assets. If the value of your estate exceeds the nil-rate band at the time of death, the excess is subject to IHT, generally at 40%. For the 2024/25 tax year, the standard IHT nil-rate band is set at £325,000.

Maximising Inheritance Tax allowances

Married couples and registered civil partners have the option to transfer any unused portion of their IHT nil-rate band to the surviving partner, effectively doubling the threshold to £650,000.

In addition, the ‘residence nil-rate band’ (RNRB), introduced in 2017, allows an additional £175,000 per person if a main residence is left to direct descendants. This can increase the overall IHT allowance to £500,000 per individual or £1 million per couple.

However, the RNRB reduces by £1 for every £2 an estate exceeds £2 million, disappearing entirely for estates above £2.35 million.

Strategic planning to reduce IHT

Having an up-to-date Will is crucial to effectively manage IHT liabilities. Older Wills may contain trusts that impact the nil-rate bands. While some individuals may postpone wealth transfer until death, making tax efficient gifts during your lifetime can be a smarter approach.

Tax-efficient gifting and transfers

IHT free gifts include:

• Annual exemption – a total of £3,000 can be giving away each tax year without it being added to the value of your estate.
• Small gift allowance – allows you to give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
• Wedding or registered civil partnership gifts – up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for others.
• Regular gifts from surplus income – these must be part of your normal expenditure and not reduce your standard of living.
• Gifts between spouses and civil partners are generally free of IHT – provided that the recipient of the gift is UK domiciled or deemed domicile.

Larger gifts may be classed as ‘potentially exempt transfers,’ which require surviving seven years to be tax-free, or ‘chargeable lifetime transfers,’ which may incur immediate IHT.

Utilising pensions for Inheritance Tax efficiency

Under the current rules, most defined contribution pensions can be passed onto your beneficiaries without them having to pay inheritance tax on the money they receive.

However, in October 2024, Chancellor Rachel Reeves announced plans to include unused pension savings and certain pension death benefits in the value of estates for IHT purposes from April 2027.

According to a Freedom of Information request by interactive investor to the Office for Budget Responsibility, it was revealed that almost 153,000 estates will now face new or additional IHT liability by 2030.

While the final details of the proposed policy remain unclear, the role of pensions will form a key component of estate planning more than ever.

Additional strategies for reducing Inheritance Tax

Other IHT reduction methods include establishing trusts, exploring specialist investment vehicles, and considering whole-of-life insurance policies written into an appropriate trust.

Given the complexity of IHT, early professional financial advice is essential. Careful planning significantly enhances the ability to leave a legacy that meets your family’s specific needs.

Disclaimer: This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice.

A pension is a long-term investment not normally accessible until age 55 (57 from april 2028 unless the plan has a protected pension age).

The financial conduct authority does not regulate tax and trust advice and will writing.