Typical inheritance tax bill rises – why you should plan now
Inheritance tax (IHT) has long been dubbed Britain’s most-hated tax, despite only affecting a small chunk of the population. That’s changing though – more people are on track to be hit by the 40% levy in coming years.
Rising house prices and frozen inheritance tax thresholds mean more families have and will be brought into the IHT net each year, known as fiscal drag.
The issue is set to worsen when pensions are included in the estate for inheritance tax from April 2027.
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
In the tax year 2023/24, 4.72% of UK deaths resulted in an inheritance tax charge, acording to latest HMRC data – an increase of 0.10 percentage points to the previous year. The proportion of estates paying inheritance tax is now the highest it has been since 2006 to 2007, when it was 5.96%.
Latest Videos FromMoneyWeek
A total of 30,400 deaths in the UK led to an IHT charge, with the average bill for IHT-paying estates standing at £231,000. Inheritance tax receipts in that period reached £7 billion, up 5% compared to the previous year.
Inheritance tax raised £8.4 billion in 2024/25 for the taxman, the Office for Budget Responsibility (OBR) said and expects this to increase to £14.7 billion in 2030/21 due to factors such as the fiscal drag, the £2.5 million cap on 100% agricultural property relief and business property relief which came in in April 2026, and making pensions as part of an estate.
With more people facing inheritance tax in the future, here’s how can you plan ahead now.
Can you make use of gifting allowances?
The standard inheritance tax threshold is £325,000, and this can be raised to £500,000 if you give your home to your children or grandchildren – provided your estate is worth less than £2 million. There are ways to reduce an inheritance tax bill though, such as through lifetime gifting.
Giving gifts can reduce inheritance tax liabilities as, if done right, they won’t be included in the estate. There are a number of allowances, such as the annual exemption, which lets you give a total of £3,000 of gifts each year without them being added to the value of your estate. You can give the whole £3,000 to one person, or divide it among different people. If this allowance wasn’t used in the tax year, it can be carried forward to the next – but only for one tax year. There are also gift allowances for weddings and civil partnerships.
Significantly larger gifts given during your lifetime could also potentially be exempt from inheritance tax. Known as the seven year rule, if you live for seven years after giving a gift, no IHT is due on it – unless the gift is part of a trust. The inheritance tax rate tapers off after three years – so even if you die within those seven years, the rate your loved one has to pay on the gift could be less than full whack (40%). The problem with the seven year rule is you likely won’t know your life expectancy, nor how much money you will need in the future, for example to pay for care.
You can also give away £250 per year to as many people as you like, known as the small gifts exemption, as long as the recipient hasn’t already benefited from the annual exemption that year.
Other gifting allowances also apply – you can give as much away as you’d like in regular payments to another person as long as you do not leave yourself short and the money is from monthly income.
If you can afford to, gifting during your lifetime could mean less of your money is subject to inheritance tax in the future. Plus, it could mean you get to see how your hard-earned money makes a difference to your loved one’s life. Though, it could be worth getting advice, as there are nuances to rules to be careful about.
Don’t avoid the inheritance conversation
Avoid talking about money, politics and religion at the dinner table, that’s how the unwritten rule goes. Conversations about inheritance may feel uncomfortable, but having these discussions are crucial.
Speaking about your plans for your estate while you’re alive means you can communicate your wishes to loved ones directly and address any concerns.
You can prepare a side letter explaining how you have arranged your will, which could help avoid disappointment or disputes after your death. It can reduce the risk of any nasty financial surprises while they’re grieving, and give them the opportunity to understand your decisions.
Make sure you keep the paperwork
Keeping a paper trail is important when it comes to inheritance tax.
If you’re in the position to give away your money, then make sure you keep a record – and put it in a safe place. Planning ahead is all well and good, but if HMRC comes knocking, your loved ones may need to show evidence.
At the same time, keeping a record of financial and personal details for after you’re gone could be incredibly useful for your loved ones after you die. Royal London has put together a “when I’m gone list” which covers where friends or family can find important documents, as well as your funeral wishes. Make sure you let your loved ones know it exists and where you keep it.