https://www.blevinsfranks.com/uk-inheritance-tax-the-mounting-impact-on-british-families/
https://www.blevinsfranks.com/uk-inheritance-tax-the-mounting-impact-on-british-families/
UK inheritance tax is no longer a niche concern. Frozen allowances, rising asset values, pensions entering the tax net and tighter reliefs mean many families will face IHT bills they never expected. For individuals and families, both in the UK and abroad, the key message is clear: early, informed planning has never been more important.
Inheritance tax (IHT) has quietly become one of the UK Treasury’s most reliable revenue raisers. Once described as a tax affecting only the very wealthy, it now touches a rapidly growing number of ordinary families – and with the measures announced in the October 2024 budget, the pain is set to intensify significantly over the coming years. The number of estates paying IHT could double by 2031.
Inheritance tax collections continue to break records
HM Revenue & Customs inheritance tax receipts have been rising steadily for more than two decades, but the pace of growth is accelerating sharply.
The amount collected in the 2005/06 tax year was around £3.3 billion, which grew slowly to £4.65 billion by 2015/16. 10 years later, the latest official figures reveal that HMRC collected £7.7 billion over the first 11 months of 2025/26. The Office for Budget Responsibility (OBR) forecasts that total receipts for 2025/26 could reach £8.7–£9 billion for the tax year, almost 5% more than last year.
Looking ahead, the figures become starker still. The OBR’s March 2026 Economic and Fiscal Outlook estimates inheritance tax receipts will climb to almost £15 billion a year by 2030/31 — nearly double the level seen just a decade earlier. It estimates that around one in ten estates will be paying inheritance tax by the end of this decade, compared with roughly one in twenty today.
Why inheritance tax receipts are rising
Fiscal drag and frozen allowances
The nil rate band has been frozen at £325,000 since 2009, and the main residence nil rate band (RNRB) at £175,000 since 2020. Both will remain unchanged until at least April 2031. Had the standard nil rate band risen with inflation since 2009, it would now stand at around £525,000 – for a married couple, that represents an additional £400,000 that could have been passed on tax free. Instead, fiscal drag has steadily pulled more estates into the IHT net – with another five years of freeze to go.
The residence nil rate band trap
While the residence nil rate band can give a couple a total IHT allowance of £1 million, it tapers away once an estate (the whole estate, not just property) exceeds £2 million, reducing by £1 for every £2 over the threshold. For estates above £2.35 million (potentially £2.7m for a couple), it disappears completely, making relatively small increases in estate value disproportionately expensive from a tax perspective.
Why inheritance tax will now rise much faster
Pensions pulled into inheritance tax from April 2027
From 6 April 2027, most unused pension funds will form part of a person’s estate for inheritance tax purposes – a fundamental shift in the UK tax landscape.
Pension pots are often the largest or second largest asset people own. The OBR estimates that this change alone will bring around 10,500 additional estates into the inheritance tax system in 2027/28, with many tens of thousands facing significantly higher tax bills going forward.
For estates already near the £2 million taper threshold, including pensions can trigger an effective 60% tax charge once the loss of the residence nil rate band is factored in.
New limits on agricultural and business reliefs
Reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) took effect on 6 April 2026. The 100% relief is now capped at £2.5 million of combined agricultural and business property per individual, with 50% relief now applying to values above this.
AIM listed shares now only qualify for only 50% BPR, instead of the previous 100%.
Inheritance tax planning
Despite tightening rules, with professional advice and careful planning, there are still plenty of opportunities to reduce inheritance tax for your loved ones. For example:
- Gifting to spouses/civil partners – these tax-free transfers can help you make full use of each nil rate band, giving a couple up to £1 million to pass on to heirs tax free.
- Use lifetime gifting effectively – the £3,000 annual gifting allowance per person, small £250 gifts to unlimited recipients, wedding gifts with higher exemptions, and regular, documented gifts out of surplus income, can remove substantial wealth from IHT over time if used consistently.
- Potentially Exempt Transfers – if time is on your side, PETS can protect your family from the worst of inheritance tax – provided you survive the full seven years after the transfer. While a taper relief can apply if you die within seven years, it is only available when the gift exceeds the nil-rate band.
- Plan early around the £2 million threshold – For estates approaching £2 million, relatively modest planning can prevent the loss of the residence nil rate band and significantly reduce the eventual tax bill.
- Consider a trust – While more complex, trust planning can be a valuable way to protect your assets, provide for loved ones, and ensure your estate is managed according to your wishes. With specialist advice, trusts can play a key role in inheritance tax planning.
- Review your pension strategy before 2027 – with pensions entering the IHT net from April 2027, you should reconsider drawdown sequencing (which assets to spend first in retirement); whether pension beneficiaries are correctly nominated, and potential alternatives such as gifting non pension assets instead.
Opportunities for long-term British expatriates
Leaving the UK does not mean leaving UK inheritance tax behind, especially if you keep UK assets. Inheritance tax planning remains especially important – and can be particularly powerful when done correctly.
Since April 2025, in most cases, UK inheritance tax now applies to worldwide assets for up to 10 years after leaving the UK. After that point, only UK situated assets remain within the scope of UK IHT. This creates planning opportunities for expatriates:
- Reducing UK based assets after the 10 year window
- Disposing of UK capital investments and re-investing in tax-efficient arrangements for your country of residence
- Reconsidering retaining UK property
- Reviewing pension planning in light of the 2027 rule changes
Importantly, while British expatriates may currently keep their UK assets close to or below the IHT threshold, the inclusion of pensions from 2027 could make this impossible without proactive planning.
Long-term expatriates moving back to the UK continue to benefit from these rules for up to 10 years, so plan carefully well ahead of your return to reap the full benefit.
Protecting your legacy and making life easier for your family
UK inheritance tax rules are more complex than ever, making do-it-yourself estate planning fraught with risk. A poorly drafted will, badly timed gifts, misunderstanding the PET rules, using trusts and life insurance incorrectly, missing valuable mitigation opportunities… all these and more could have a detrimental impact on your family’s inheritance – potentially tens of thousands of pounds.
Inheritance tax is an area where planning mistakes, or a lack of planning, can prove extremely costly – and not just in terms of the tax paid. For example, inheritance tax must be paid within six months of the month of death, whether or not probate has been granted. Late payment can incur daily interest.
Reducing your tax liability is important, but so is having a plan in place to deal with the process of administering an estate after death.
A carefully structured estate plan will avoid probate where possible, ensure your assets are passed to your family as smoothly as possible, ensure your wishes for your heirs are followed, help protect your wealth for future generations – and, of course, reduce your inheritance tax liability.
Contact Blevins Franks today to arrange a personal consultation.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
https://www.blevinsfranks.com/uk-inheritance-tax-the-mounting-impact-on-british-families/