Figures from HM Revenue and Customs (HMRC) have cast a spotlight on the rising trajectory of inheritance tax (IHT). Between April and December 2024, IHT receipts hit £6.3 billion, a £600 million increase compared to the same period the previous year. While currently, only 4% of estates are liable for inheritance tax, government estimates suggest that this proportion could rise to 10% by 2030. Therefore, there will be a marked increase in the number of people who are impacted by inheritance tax trends across the next decade.
The "Golden Goose" of Taxation
Nicholas Hyett, investment manager at Wealth Club, aptly refers to IHT as "something of a golden goose for HMRC." He notes that the tax take from IHT has been rising inexorably and is poised to affect more estates in the coming years.
"Inheritance tax continues to be Britain's most hated tax," says Hyett. "What really gets to many people is the double taxation. You're taxed on the money when you earn it and again when you die, resulting in a combined income tax and inheritance tax rate of 67% for additional rate taxpayers—potentially more if you're also paying National Insurance."
For those looking to mitigate the effects of IHT, Hyett suggests making use of surplus income. Regular gifts made from leftover income can be passed on to loved ones free from inheritance tax. This strategy is particularly popular among grandparents, who often use it to cover expenses like school or university fees. "Avoiding double taxation is a nice added sweetener," he remarks.
Changes to Inheritance Tax
Several reforms announced during the October 2024 Budget promise to reshape the inheritance tax framework in the coming years. These changes include:
1. Frozen IHT Thresholds Extended Until 2030
The freeze on IHT thresholds has been extended by two years, keeping them static until 2030. As property values and inflation rise, this effectively pulls more estates into the tax net.
2. Reform of Agricultural Relief and Business Property Relief
Starting April 2026, the first £1 million of qualifying combined assets under these reliefs will be fully exempt from inheritance tax. However, for assets exceeding £1 million, a 50% relief will apply, resulting in an effective tax rate of 20%.
3. Changes to AIM Shares
Qualifying AIM shares, previously exempt from inheritance tax after being held for two years, will now be subject to a 20% inheritance tax rate from 2026.
4. Inherited Pensions Subject to Consultation
From April 6, 2027, inherited pensions could face inheritance tax in addition to income tax on recipients. This could lead to an effective tax rate of up to 67%, significantly impacting beneficiaries. This proposal is still under consultation.
What These Changes Mean for Taxpayers
The freeze on IHT thresholds, combined with the rising value of assets such as property, means that an increasing number of estates will fall within the scope of inheritance tax. As a result, families will need to take proactive steps to minimise their tax liabilities. The changes to agricultural relief, business property relief, and AIM shares will particularly impact those with substantial investments or family-run businesses.
Planning Ahead: Strategies to Reduce IHT
Taxpayers concerned about the rising burden of inheritance tax should consider taking advantage of available reliefs and exemptions. As the tax landscape continues to evolve, seeking professional advice will be critical for families navigating these changes. Inheritance tax may be becoming a larger part of HMRC's revenue stream, but with careful planning, it's possible to reduce its impact on your estate.
If you would like more information about tax relief opportunities contact Sustainable Wealth Group today. We work with a plethora of EIS companies that allow you to invest in the companies of the future and reduce your tax burden.
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