Inheritance tax (IHT) has soared to a new record, with receipts hitting £8.2bn for the 2024/25 tax year – almost a billion higher than last year’s previous record.
It shows families are increasingly finding themselves caught between the rock of rising asset values and the hard place of frozen thresholds.
The rapid rise in house prices we’ve seen in recent years is a big reason why more families are having to think about IHT. And the fact that pensions are expected to be included in IHT calculations from April 2027 only makes the situation worse.
The result is that the IHT issue is no longer one for the richest people.
This article isn’t personal advice. Tax rules can change, and any benefits depend on your circumstances. Investments will rise and fall in value, so you could get back less than you invest. If you're not sure what's right for you, ask for financial advice.
How does inheritance tax work?
IHT is only levied on estates worth more than £325,000.
If you’re passing on your main residence to children or grandchildren, you get a further allowance called the residential nil rate band which is currently worth £175,000.
Added to this, you won’t pay IHT on any assets passed to a spouse, no matter what their value. They then also inherit any of your unused allowances too.
This means that a surviving spouse can pass down up to £1mn before IHT becomes an issue.
How to reduce your IHT bill
With IHT bills expecting to carry on climbing, it’s likely more people will be making use of gifting allowances.
To start with, if you gift to a loved one it will pass out of your estate for IHT purposes after seven years, no matter what its value.
However, there are also a number of gifts you can make which are immediately exempt from IHT.
Every tax year you can gift up to £3,000 without it being counted as part of your estate. You can also carry forward any unused annual exemption to the following tax year, but only for one year. This is available per person, so a couple could use their combined annual exemptions
Wedding or civil ceremony gifts are exempt up to £1,000 per person, or up to £5,000 for a child and £2,500 for a grandchild or great-grandchild
Gifts to charities (UK registered) and political parties are usually immediately exempt as well
You can also give up to £250 per tax year to any number of people, provided they haven’t received a gift from you which uses another exemption. Although these exempt amounts might seem relatively small, gifting in these ways over time can add up to a big difference.
For those with larger potential liabilities the ‘gifting out of surplus income’ rules will come in handy.
However, you will need to make careful records to demonstrate the gifts are regular, come out of your income, and that making them doesn’t disrupt your standard of living.
You’ll also need to make careful notes of your gifting to demonstrate you’ve met these rules, otherwise your loved ones could face a tax bill.
Find out more about gifting and other ways to reduce your IHT bill in our Essential Guide to Inheritance Tax.
Gifting while you’re alive has the benefit of you actually being able to see your loved ones enjoying your gift.
However, you need to make sure you don’t get so worried about reducing your IHT bill that you give away too much too early and potentially leave yourself struggling later on.
How financial advice can help with estate planning
If you want to pass on as much wealth as possible to your loved ones, financial advice can help you understand the complexities of IHT and suggest ways to pass on your wealth within your means.
An adviser can help by making sure you’re using available exemptions and allowances, creating trusts, timing your gifts, and more.
Looking to the future, an adviser can also help you prepare for potential tax changes which could have a knock-on effect on things like your retirement plans.
Book a call with our advice team today to find out more.
They’ll explain more about our service and the costs involved, but they won’t provide personal advice at this stage.