Executive summary:

• ‍Rising IHT receipts: Inheritance Tax receipts have been increasing year-on-year, driven by more estates falling into the taxable bracket.
• ‍Key factors driving IHT increase: Frozen tax thresholds (and extended for a further two years), such as the Nil Rate Band and Residence Nil-Rate Band, along with rising property values and fiscal drag are pushing more estates into IHT liability, including those of middle-income families.
• ‍Pension funds and IHT: The introduction of pension funds to be within the scope for IHT purposes will likely cause a further increase in IHT receipts from 2027.
• ‍Importance of proactive estate planning: Financial advisers need to focus on proactive strategies like using trusts, gift allowances, and reliefs to help clients minimise their IHT burden.

The UK's Inheritance Tax (IHT) receipts have been steadily increasing year on year, with recent figures revealing an upward trend as reported by the UK Government in the latest Autumn Budget. For financial advisers, this pattern has significant implications as more estates are being caught in the IHT net. Factors such as frozen tax thresholds, the introduction of pension funds to be within scope for IHT, rising property values and fiscal drag are all contributing to the increase, affecting a wider range of estates, including those of middle-income families.

This article explores the reasons behind the rising IHT receipts, providing insights into the current landscape, offering mitigation strategies and Inheritance Tax solutions for advisers to better serve their clients when it comes to estate planning.

What is the current state of IHT receipts?

Recent data underscores the increasing trend in IHT receipts. From April to November 2024, receipts reached £5.7bn^[1], an additional £600m increase from the same period in the previous year.  

Moreover, HMRC projects that IHT receipts could climb to £9.7bn annually by 2028/29^[2]. This steady rise in IHT revenue can be attributed to a combination of factors that have expanded the number of estates liable for this tax, underscoring the importance for advisers to understand these dynamics.

Frozen thresholds as a form of Stealth Tax

One of the key drivers of rising IHT receipts is the government's decision to freeze key tax thresholds, effectively serving as a form of stealth taxation.  

The Nil Rate Band (NRB), which allows up to £325,000 of an estate to be passed on tax-free, has been frozen since 2009 and will remain at this level until ​​5 April 2030 - recently extended by a further two years following the Government’s Autumn budget.  

Despite inflation and rising asset values, this threshold has not increased, thereby pulling more estates into the taxable bracket over time. You can see the effects of this freeze in the figure below, where IHT liabilities and taxable estates have risen steadily since 2009.  

Similarly, the Residence Nil-Rate Band (RNRB), introduced in 2017 and frozen until April 2030, provides an additional allowance of up to £175,000 per person for those passing on a family home to direct descendants.  

However, the benefits of the RNRB are limited; it tapers for estates valued over £2 million, reducing the advantage for larger estates. Although short-lived, this effect can be seen in the figure below, where IHT liabilities fell from 2017 to 2019.  

The combination of these frozen thresholds and their limitations means more estates are paying IHT, contributing to the rising receipts.

Impact of rising property values

The sustained increase in property values across the UK is another major factor behind the rising IHT receipts. Average UK house prices have continued to grow, often outpacing inflation.

This has led to more estates being pushed over the IHT threshold, particularly in regions where property values are exceptionally high, such as London and the South East.

As property values rise, so does the value of estates, meaning more estates exceed the Nil Rate Band and become subject to IHT.

For many clients, especially those who have owned their homes for several decades, the growth in property values represents a significant increase in their estate's taxable value, often pushing them unexpectedly into the IHT net.

Fiscal drag and its effect on middle-income families

Fiscal drag occurs when inflation or rising asset values push taxpayers into higher tax brackets or make them liable for taxes that were not initially intended for them.

In the context of IHT, frozen thresholds combined with rising property and asset values mean that middle-income families are increasingly affected by IHT. What was once considered a tax primarily for the wealthy now affects a broader demographic.

Pension funds to be within scope for IHT

Beginning on 6 April 2027, most unused pension funds will be included within the value of a person’s estate for inheritance tax purposes. This reform was announced in the Autumn Budget 2024 and is currently in a consultation period, but will inevitably mean more clients will have to pay inheritance tax.

This move from the Government will see a considerably larger proportion of IHT receipts being submitted to HMRC contributing to the trend of increased IHT receipts. This change will mean more clients and their beneficiaries will need support from financial advisers regarding pensions and its relationship with IHT.

The government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates – or around 1.5% of total UK deaths - will become liable to pay Inheritance Tax where this would not previously have been the case. Around 38,500 estates will pay more Inheritance Tax than would previously have been the case.^[6]

Strategies for minimising IHT impact

Given the increasing IHT receipts and potential for further reforms, proactive estate planning is more crucial than ever. Financial advisers should consider a range of strategies to help clients maximise benefit from IHT solutions.

Below we’ve highlighted various strategies for financial advisers to consider when estate planning for their client’s.

Importance of estate planning and regular reviews

Regular estate planning reviews are essential to stay ahead of legislative changes and shifting asset values. By periodically assessing clients' estate plans, advisers can ensure that all available reliefs and exemptions are being utilised effectively.

Use of Trusts, Gift allowances, and Pensions for tax-efficient wealth transfer

Trusts

Trusts can be a powerful tool for managing inheritance tax (IHT) liabilities, as assets held in a trust have a separate legal identity. If certain conditions are met, trusts can help reduce a person’s IHT liabilities while allowing clients to retain some control over their assets and potentially lower the taxable value of their estate.

Gifts

Advisers should also encourage clients to make use of gift allowances, such as the annual gifting exemption. You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. Gifts made more than seven years before death are exempt from inheritance tax (IHT).

However, gifts made within this period are still subject to IHT, with the tax rate decreasing on a sliding scale based on the number of years between the gift and the donor’s death, a concept known as Taper Relief.

Pensions

Using pensions as part of an estate planning strategy can be beneficial until April 2027, at which point inherited pension funds will be within the scope of the deceased’s estate.

Until this point, pension pots fall outside of a person’s estate and are not taxed upon death and therefore, can often be passed on free  of IHT (subject to certain conditions), allowing wealth to be preserved for future generations while staying outside the taxable estate.

Business Relief as an IHT solution

For clients looking to reduce their IHT liabilities, Business Relief (BR) can be a suitable option in providing significant IHT savings, whilst helping to support UK businesses.

By purchasing shares in a company that qualifies for Business Relief, you could potentially reduce your Inheritance Tax liability. This is contingent on the type of business asset and how long you own the shares for. Shares in Business Relief qualifying companies, if held for a minimum of two years, and at time of death, should be eligible for 100% inheritance tax relief.

However, from April 2026, 100% Business Relief will continue to apply to the first £1m of qualifying business and agricultural assets (in addition to the current Nil Rate Band worth up to £500k per individual) and, thereafter, IHT will apply at half the normal rate, effectively reducing to 20%. This change will apply to unlisted inheritance tax solutions and private businesses that otherwise meet the Business Relief conditions.

For Business Relief qualifying companies listed on AIM, IHT will apply at the halved rate of 20% (irrespective of the size of investment).

Advisers should be aware of the qualifying criteria for these reliefs and consider them as part of a broader estate planning strategy. For more information on Business Relief read our guide.

The importance of proactive estate planning for your clients

As IHT receipts continue to rise, financial advisers must stay informed about the evolving landscape to provide optimal guidance to their clients. The combination of frozen thresholds and increasing asset values makes proactive estate planning services more crucial than ever.

By understanding these trends and implementing effective strategies, advisers can help their clients navigate the complexities of IHT and maximise the inheritance passed on to beneficiaries.

Speak to one of our experts today to understand how we can help you support your clients’ minimise their IHT liability. Our range of IHT solutions using Business Relief could help mitigate the amount of tax paid from your clients’ estates.

‍Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

References

^[1] HMRC Inheritance Tax receipts

^[2] IHT receipts projections

^[3] HMRC Frozen Nil Rate Band

^[4] HMRC IHT liabilities and tax paying estates

^[5] Average UK house prices

^[6] Technical consultation period