UK Inheritance Tax: Why More Families Than Ever Need a Plan

For many years, inheritance tax (IHT) was viewed as a tax that affected only the wealthiest families. Today, that perception is increasingly outdated. Frozen tax allowances, rising property prices, growing pension wealth and recent legislative changes mean that a far greater number of individuals and families are now exposed to inheritance tax than ever before.

The latest changes announced by the UK Government, combined with existing thresholds that have remained unchanged for years, are expected to bring thousands more estates into the inheritance tax net over the coming decade. For those living in the UK, as well as British expatriates with UK assets, proactive estate planning has become an essential part of protecting family wealth and preserving a legacy for future generations.

Inheritance Tax Receipts Continue to Rise

The growth in inheritance tax receipts tells its own story.

HM Revenue & Customs has seen a steady increase in IHT revenues for many years. What was once a relatively modest source of government income has become one of the Treasury’s fastest-growing tax streams.

In the 2005/06 tax year, inheritance tax generated approximately £3.3 billion in revenue. By 2015/16, this had risen to £4.65 billion. More recently, official figures showed HMRC collected £7.7 billion during the first eleven months of the 2025/26 tax year alone, with forecasts suggesting the annual figure could reach between £8.7 billion and £9 billion.

The longer-term outlook is even more significant. The Office for Budget Responsibility projects inheritance tax receipts could approach £15 billion annually by 2030/31. By the end of the decade, approximately one in ten estates could face an inheritance tax liability, compared with around one in twenty today.

Why More Estates Are Being Caught

Frozen Allowances and Fiscal Drag

One of the biggest drivers behind rising inheritance tax receipts is fiscal drag.

The standard nil-rate band has remained fixed at £325,000 since 2009. Meanwhile, the residence nil-rate band, introduced later to provide additional relief on family homes, has been frozen at £175,000 since 2020. Both thresholds are expected to remain unchanged until at least April 2031.

While these figures have stood still, asset values have not.

Property prices across many parts of the UK have increased substantially over the past decade, while investment portfolios and pension values have also grown. As a result, more families are finding themselves above inheritance tax thresholds despite not considering themselves wealthy.

Had the standard nil-rate band increased in line with inflation since 2009, it would now be significantly higher. Instead, frozen thresholds mean more estates are gradually being pulled into the inheritance tax system each year.

The Residence Nil-Rate Band Trap

Many homeowners assume that a married couple can pass on £1 million free from inheritance tax.

While this can be true, there is an important caveat.

The residence nil-rate band begins to reduce once an estate exceeds £2 million in value. The allowance falls by £1 for every £2 above this threshold and can disappear entirely for larger estates. This creates a situation where relatively modest increases in wealth can trigger disproportionately large inheritance tax liabilities.

For successful business owners, property investors and individuals with significant pension assets, understanding these tapering rules is increasingly important.

The Major Change Coming in 2027

Pensions Enter the Inheritance Tax Net

Perhaps the most significant inheritance tax development in recent years is the decision to bring most unused pension funds into a person’s estate for inheritance tax purposes from 6 April 2027.

Historically, pensions have often played a valuable role in estate planning because they could frequently be passed to beneficiaries outside of the estate.

From April 2027, that position changes significantly.

For many people, their pension represents one of their largest assets. Including pension wealth when calculating estate values could push thousands of families above inheritance tax thresholds for the first time.

The Office for Budget Responsibility estimates that the change alone could bring more than 10,000 additional estates into the inheritance tax system in the first year. Many others will see their potential tax liability increase substantially.

For estates already close to the £2 million residence nil-rate band taper threshold, the inclusion of pension assets may have an even greater impact by accelerating the loss of available allowances.

Changes to Business and Agricultural Relief

Inheritance tax planning has traditionally relied on valuable reliefs for business and agricultural assets.

However, recent reforms have tightened these rules.

From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) have become more restrictive, with limits applied to the amount qualifying for full relief. In addition, AIM-listed shares now receive reduced relief compared with previous rules.

For business owners, farmers and investors who have incorporated these assets into their estate planning strategy, a review may now be appropriate.

Effective Inheritance Tax Planning Strategies

While inheritance tax rules have become more challenging, there are still numerous opportunities to reduce potential liabilities.

Make Full Use of Spousal Exemptions

Transfers between spouses and civil partners are generally exempt from inheritance tax. Careful structuring can help couples maximise available allowances and potentially pass significant wealth to future generations more tax efficiently.

Use Gifting Allowances

The annual gifting allowance remains an effective planning tool.

Regular gifts, small gift exemptions, wedding gift allowances and gifts made from surplus income can gradually remove assets from an estate while supporting family members during your lifetime.

Consider Potentially Exempt Transfers

Potentially Exempt Transfers (PETs) remain one of the most powerful inheritance tax planning strategies available.

Provided the individual survives for seven years following the gift, the transferred assets generally fall outside the estate for inheritance tax purposes.

Review Pension Strategies

With pension wealth entering the inheritance tax system from 2027, retirement and estate planning should no longer be considered separately.

Individuals may wish to review beneficiary nominations, withdrawal strategies and the order in which retirement assets are used. Early planning could make a significant difference to future tax outcomes.

Explore Trust Planning

Trusts continue to play an important role in many estate planning arrangements.

Although trust planning has become more complex over the years, appropriately structured trusts can provide asset protection, succession planning benefits and potential inheritance tax advantages when used correctly and with professional guidance.

Important Considerations for British Expats

Many British expatriates assume that leaving the UK automatically removes inheritance tax concerns.

In reality, the position is often more complicated.

Since April 2025, UK inheritance tax can continue to apply to worldwide assets for a significant period after leaving the UK. In many cases, exposure can remain for up to ten years following departure before only UK-situated assets remain within the UK inheritance tax system.

This creates both challenges and opportunities.

Long-term expatriates may benefit from reviewing:

• UK property ownership
• UK-based investment holdings
• Pension arrangements
• Estate structures across multiple jurisdictions
• Succession planning strategies in their country of residence

For British citizens living in countries such as Portugal, Spain, France, Cyprus or the UAE, specialist cross-border advice can help identify opportunities while avoiding unintended tax consequences.

Protecting Your Legacy

Inheritance tax planning is no longer simply about reducing tax. It is about creating a clear strategy for passing wealth efficiently, protecting loved ones and reducing administrative burdens during what is often a difficult time for families.

Poorly drafted wills, ineffective gifting strategies, outdated pension nominations or misunderstandings around trusts can all create unnecessary complications and increase tax liabilities. In addition, inheritance tax must generally be paid within six months of the month of death, regardless of whether probate has been completed.

A carefully structured estate plan can help preserve family wealth, provide clarity for beneficiaries and support a smoother transfer of assets across generations.

Final Thoughts

Inheritance tax is becoming an increasingly important consideration for a growing number of families. Frozen allowances, higher asset values, pension reforms and tighter reliefs mean that many people who previously believed inheritance tax would not affect them may need to reconsider their position.

Whether you live in the UK or abroad, the most effective inheritance tax planning typically starts early. Reviewing your estate regularly, understanding upcoming legislative changes and seeking professional cross-border advice where appropriate can help you preserve more of your wealth for future generations.

This article is for general information purposes only and does not constitute financial, tax or legal advice. Tax treatment depends on individual circumstances and may change in the future. Investments can fall as well as rise in value, and you may get back less than you originally invested.