Inheritance tax takings reach record high - what does it mean for you?

Inheritance tax takings have reached record highs – and are expected to continue rising as pensions soon come under the scope of inheritance tax. The latest figures for inheritance tax (IHT) receipts show that HMRC collected £8.2 billion in the financial year from April 2024 to March 2025 – up £0.8 billion (an 11% increase) on the previous year.

The monthly figures for April 2025 have also been released, which were £800m – up 14% year-on-year. So, what is inheritance tax, who currently pays it, and who might face a bill in the future?

What’s on this page?

• How inheritance tax works
• Pensions and inheritance tax
• Who pays inheritance tax?
• How to reduce inheritance tax
• Summary

How inheritance tax works

IHT is paid when someone dies and leaves behind money, property or other assets, above the IHT thresholds. The IHT rate is 40% when it applies. Just 4.4% of deaths result in an inheritance tax charge – although the percentage of estates liable for inheritance tax is significantly higher, since many estates are passed inheritance tax-free to a spouse on the first death, and only pay it when the remaining spouse dies.

The figure is continuously rising, because of frozen thresholds at which IHT is due. And takings are expected to surge further when pensions become liable for inheritance tax from April 2027.

The Office for Budget Responsibility (OBR) forecasts that 10% of estates may be liable for inheritance tax in 2030. The standard nil-rate band (the amount of assets you can leave without paying IHT) is £325,000 per person.

If you’re married, this allowance is transferred to the surviving partner after death, so it essentially doubles to £650,000. No IHT is charged when a married couple, or those in a civil partnership, pass on money or assets to each other – no matter the amount.

If you own your main home and pass this on to your children or grandchildren (including stepchildren or adopted children), you get an additional allowance, the residence nil-rate band (RNRB). This is £175,000 per person.

This means a married couple with children can pass on up to £1 million before inheritance tax is charged. The £325,000 per person allowance has remained unchanged since 2009, while the additional £175,000 property allowance (officially called the nil rate residence band or RNRB) has been frozen since it was introduced in 2017. These thresholds will remain frozen until at least 2030.

This ‘fiscal drag’ means that as asset values (especially property) increase with inflation, more estates are pulled into the IHT net. Jonathan Halberda, a specialist financial adviser at Wesleyan Financial Services, says that for these reasons it’s unsurprising that revenues from inheritance tax are consistently rising.

“Month-on-month, we’re seeing the impact of frozen thresholds that no longer reflect current asset values, alongside an increasingly complex system. Many who wouldn’t have faced a tax bill just a few years ago are now being caught out, while others don’t realise their estate is at risk until it’s too late to plan.”

Another point to consider is that the £175,000 property allowance tapers down by £1 for every £2 on estates worth more than £2 million. This means that for a married couple passing on a family home, the combined £350,000 property allowance (RNRB) is lost entirely on estates worth more than £2.7 million.

Couples with estates worth more than £2.7 million would only get the standard combined allowance of £650,000. Remember to make sure you have a will, expressing how you want your estate to be shared, and that your will is up to date.

Pensions and inheritance tax

Currently, most pension pots can be passed on outside of your estate for IHT purposes. However, proposed changes from April 2027 would bring them within the scope of IHT.

Changing pension trends means people are increasingly likely to have defined contribution pensions to pass on, rather than a defined benefit pension that pays a guaranteed income for life and usually stops on death or after a spouse’s death.

Assuming the planned changes come into force, they would significantly increase the number of estates liable for IHT, particularly those with substantial defined contribution pension savings.

Who pays inheritance tax?

Inheritance tax is levied on a person’s estate after their death (unless they have left everything to their surviving spouse). While the liability falls on the estate, in effect it is the beneficiaries who are affected.

There's a lot of variation between regions of the UK on how much IHT is paid, as HMRC figures show. Unsurprisingly, due to higher property prices, London and south-east England have the highest proportion of households paying inheritance tax. The latest regional breakdown currently available is for the 2021-22 tax year.

Then, 4,540 households in London and 5,860 households in the south-east paid IHT in the 2021/22 tax year, according to HMRC figures. This compares with 325 in Northern Ireland, 484 in the north-east and 897 in Wales, the regions with the lowest numbers.

The total number of estates paying IHT was 27,800 across the tax year, an increase of 3% on the previous year. The average amount of IHT paid across all these estates paying IHT is £215,000. This figure is brought up by the high amount paid particularly by estates worth more than £1.5 million.

The 2,460 estates valued at between £1.5 million and £2 million had an average IHT bill of £325,000. For the 2,871 estates worth £2 million to £7.5 million, the average IHT bill was £1.9 million while the average bill paid by the 170 estates worth above £10 million was £3.9m.

But as the table below shows, the average percentage of the estate value paid in IHT doesn't really increase in estates above £2 million. This is despite the fact that the amounts below the threshold will be making up a lower proportion of larger estates. In fact, estates worth more than £10 million paid less IHT as a percentage of their value than estates worth 2 million. This suggests that IHT planning can make a significant difference to the outcome.

How to reduce inheritance tax

If you have assets and wealth to pass on after your death, and want to reduce a potential IHT tax charge for your beneficiaries, there are some steps you could take to reduce an IHT bill.

Potentially exempt transfers

Gifting assets during your lifetime is a common strategy. While you can, in principle, gift any amount, it’s crucial to ensure you retain sufficient funds for your own retirement needs. These gifts are known as potentially exempt transfers (PETs).

As long as you live a further seven years after making the gift, it falls outside your estate and will not be subject to IHT after your death.

If you die less than seven years after making the gift – and your estate is above the nil-rate band – the gift is counted back into your estate. So if you have given away £50,000, it would reduce your allowance from £325,000 to £275,000.

Gifting allowances

You also have an annual gifting allowance that can be used each year without worrying about inheritance tax. You can give away a total of £3,000 which is exempt from IHT immediately, without the seven-year rule. Any unused allowance can be carried forward one tax year.

You can also give small gifts of up to £250 to as many people as you like (as long as they haven't received a gift from your £3,000 annual exemption.) And you can give wedding or civil partnership gifts of £5,000 to your children, £2,500 to grandchildren or great-grandchildren, and £1,000 to others, without any IHT liability. You can give more than one different type of gift to the same person, except for the small gift allowance.

Gifts to charities and political parties are also usually exempt from IHT.

Gifts out of income

One option that is often overlooked is to give away out of surplus income. Gifts out of surplus income do not require the giver to survive for seven years to escape IHT, as long as it can be proved the gifts are regular (monthly or annually) and have not impacted the giver’s standard of living.

Rachael Griffin, a tax and financial planning specialist at wealth management Quilter, says the gifting out of surplus income strategy is underused, probably because of its complexity and the requirement for detailed record-keeping.

“For those who can afford to make gifts from surplus income, this is an incredibly valuable strategy, as the relief applies immediately without needing to wait seven years, which is required for most other gifts above the £3,000 annual exemption. Given the upcoming pension tax changes in 2027, we expect to see a sharp increase in the use of this exemption as more people look for ways to mitigate IHT liabilities.”

• Read more about how to make regular gifts out of income to cut an IHT bill. 

Summary

With IHT receipts on the rise and potential changes to pension taxation on the horizon, understanding your potential liability and exploring legitimate ways to mitigate it is more important than ever. Reviewing your will, understanding your allowances, and considering lifetime gifting strategies can all play a part.

However, IHT planning can be complex, so seeking professional financial advice tailored to your individual circumstances is highly recommended.