UK households are confronting what experts describe as "sudden and unexpectedly large" inheritance tax bills, as new figures reveal HMRC receipts have surged to £6.6 billion. This represents a significant increase of £200 million compared to the same period last year, highlighting a growing financial burden on families across the nation.
The Fiscal Drag Effect in Action
The steady climb in inheritance tax revenue is largely attributed to a phenomenon known as the "fiscal drag effect." This occurs when tax thresholds remain frozen while asset prices, particularly property values, continue to rise, pulling more estates into the tax net. Ian Dyall, Head of Estate Planning at wealth management firm Evelyn Partners, issued a stark warning about the potential consequences.
"A sudden and unexpectedly large IHT bill, particularly where liquid assets are in short supply, could spell the end for even a successful enterprise and the jobs it provides," Mr Dyall cautioned. His comments underscore the broader economic impact beyond individual households, affecting business sustainability and employment.
Record Revenue Generation for the Treasury
David Cooper, director at retirement specialist Just Group, noted that inheritance tax has become a powerful revenue generator for the Treasury, with four consecutive years of record tax takes. "This trend is driven by frozen thresholds and rising asset prices," he explained. While the tax is on track for a fifth annual high, Cooper observed signs that the rate of increase has flattened this year.
The Treasury is reportedly banking on policies announced at the Autumn Budget 2024 to provide fresh momentum, aiming to meet a forecasted 67% increase in revenue over the next five years. Cooper advised that in this changeable fiscal environment, individuals concerned about potential IHT liability should obtain up-to-date estate valuations, including property wealth assessments.
Expert Warnings and Planning Advice
Nick Henshaw, Head of Intermediary Distribution at Wesleyan Financial Services, highlighted the approaching deadline for pension changes in April 2027. "We're 15 months from the April 2027 pension changes and that window is tighter than most clients realise," he said. Henshaw emphasised that proactive planning conversations happening now—modelling drawdown scenarios, reviewing estate structures, and quantifying tax impacts—are crucial to avoid panic decisions later.
Andrew Tully, technical services director at Nucleus, revealed that IHT receipts have grown by more than 50% over the last five years, a trend 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," he stated.
Future Changes and Mitigation Strategies
Although the government has eased the impact of agricultural and business relief changes by increasing the 100% relief threshold to £2.5 million, significant challenges remain. The planned inclusion of pensions within IHT from 6 April 2027 is particularly concerning. Tully warned that this move "will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry and HMRC," while driving further strong growth in IHT receipts after 2027.
Looking ahead, experts agree that IHT is likely to become a more relevant issue for many more families within the next five years. Professional advisers can help clients mitigate these taxes through various strategies:
- Setting up trusts to protect assets
- Making use of annual gift allowances
- Utilising the spousal exemption effectively
- Reviewing estate structures regularly
Mr Dyall concluded that best estate planning practice is often far from straightforward, requiring careful consideration and professional guidance to navigate the complex tax landscape effectively.
