Inheritance tax – what to know before the Autumn Budget

Inheritance tax (IHT), long dubbed the UK’s most hated tax, is making headlines again. In just the first half of this tax year alone, it added £4.4bn to the Treasury piggy bank - £100mn more than in the same period last year.

It’s not just the tax receipts that are climbing. Financial advisers are seeing a surge in IHT planning enquiries with momentum fuelled by speculation. From rumoured changes to pension tax-free cash to the effects of the announcement in last year’s Budget that most unspent pension pots will be brought into the IHT net from 6 April 2027, people are turning to advice. The latter is estimating 10,500 more estates will pay IHT in 2027/28.

With the infamous red briefcase poised for its next outing, there are rumours that Rachel Reeves might once again turn her attention to IHT. The latest whispers suggest that the Chancellor could be eyeing the gifting rules to help plug the large hole in the public finances.

But inheritance tax planning isn’t just about numbers. It’s about looking after your family, securing peace of mind, and the legacy you hope to leave behind. Taking steps now could help protect your wealth and deliver meaningful savings for loved ones.

This article isn’t personal advice. Tax rules can change, and any benefits depend on your circumstances. If you're not sure what's right for you, ask for financial advice.

How does inheritance tax work?

Frozen rates and a rapid rise in house prices, mean that IHT is becoming a reality for more families than ever before.

IHT applies only to estates valued above £325,000 - a threshold that has remained frozen since 2009. If it had risen in line with inflation, it would now sit at just over £520,000.

If you’re passing on your main residence to children or grandchildren (or other ‘direct descendants’), you could benefit from an additional allowance - the residence nil-rate band - currently set at £175,000. Introduced in 2017 at £100,000 and raised to £175,000 by April 2020, this too has now failed to keep pace with inflation, if it had, it would now be worth around £224,000.

Transfers between spouses or civil partners are normally free of IHT, regardless of value, and any unused IHT allowance can be transferred to the surviving partner. Together, this means a surviving spouse or civil partner can currently pass on up to £1mn before IHT kicks in.

How to reduce your inheritance tax bill

There is no silver bullet to lowering your tax bill.

The most effective IHT plans often involve a blend of approaches to achieve the overall desired strategy. The earlier you start planning, the more flexibility and impact you’ll have.

The most straightforward way to reduce the value of your estate is by spending more – but balance is key.

Whether it’s travel or treating loved ones, purposeful spending can enhance your lifestyle and reduce your future tax bill.

But be careful to stay within your means as the older you get, the more care you might need to pay for.

With IHT bills expected to carry on climbing, it’s likely more people will be making use of gifting allowances.

Gifts of any size fall outside your estate after seven years. But some gifts are immediately exempt, like:

• Annual exemption: Gift up to £3,000 each tax year 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 gifts: Up to £5,000 per child, £2,500 for a grandchild or great-grandchild, and £1,000 for others.

• Small gifts: You can gift up to £250 per tax year to any number of people, provided they haven’t received a gift from you which uses another exemption.

• Charities: Gifts to charities (UK registered) and political parties are usually immediately exempt as well.

While these exempt amounts might seem relatively small, consistent small gifts over a long timeframe can make a big difference. Again, underscoring the value of planning sooner rather than later.

For those in good health, a whole-of-life insurance policy placed in trust can provide an effective way to cover an IHT bill.

The policy provides a guaranteed lump sum payout without delay – a crucial benefit given that IHT bills must usually be settled within six months of death. This approach also preserves the estate.

In recent years interest rates and gilt yields have risen, premiums have become more competitive making this option increasingly attractive as part of long-term estate planning.

If you own a qualifying business, business property relief can deliver up to 100% relief from inheritance tax.

That said, it demands careful planning and a clear understanding of the underlying business risks and relief conditions. It can play a part in a wider strategy, but is rarely a stand-alone solution and therefore it’s best approached with professional advice as part of a broader estate plan.