Inheritance tax is on the rise. The latest figures from HM Revenue & Customs revealed that total receipts for the tax year April 2024 to March 2025 reached a record £8.2 billion.

The figure is up £0.8 billion on the previous year, and it is a trend that experts expect to see continue.

The Office for Budget Responsibility, which provides independent analysis of the public finances, suggests receipts for IHT will hit an estimated £9.7 billion in the 2028/29 tax year.

Pensions coming into scope

Any measure of taxation is unlikely to be popular, but such headlines only serve to underline the displeasure that surrounds IHT. Britons consistently deem the 40% charge to be unfair, and the majority are said to be in favour of scrapping it completely.

Attitudes have soured further since the Labour government’s Autumn Statement on 30 October 2024, when Chancellor Rachel Reeves announced that most unused pension funds and death benefits would be included with the calculation of an individual’s estate from 6 April 2027.

Following the policy change, the proportion of people labelling inheritance tax as “very unfair” increased to 30%, according to data from research analysts YouGov. This figure is almost ten percentage points above the level recorded five years previously.

Thresholds causing fiscal drag

In reality, only a relatively small number of people can expect to feel the impact of IHT. Official figures show that 4.39% of UK deaths incurred the charge in the 2021/22 tax year, which translates to around one in 20 estates.

It is, however, significantly higher than the 2.5% recorded in 2009/10, and this figure is expected to rise to over 7% by 2032/33, meaning far more estates will be affected.

A significant factor in this increase is the freezing of IHT thresholds. As it currently stands, the first £325,000 of an estate does not incur a charge – known as the nil-rate band. This extends to £500,000 in cases where a residence is passed on to direct heirs including stepchildren, adopted children and foster children – known as the residence nil-rate band (RNRB).

Married couples and civil partners can pass on unused benefits, making it possible for up to £1 million to be exempt from IHT if this is the case – although a tapering system reduces the RNRB by £1 for every £2 where estates have a net value of more than £2 million.

These thresholds, originally put in place until 2028, have since been fixed until 2030.

Rethinking legacy plans

With many people benefiting from a rising property market, more estates were already pushing at, or exceeding, IHT limits. Now, with pension wealth set to be included in the valuation of an estate, that figure is only likely to grow.

In addition, there are concerns that some families will be left facing a “double tax”, since beneficiaries might need to pay IHT as well as the income tax that is currently payable on inherited pensions where someone is aged 75 or older when they die.

Faced with the potential of an unexpected inheritance tax charge, many are now rethinking their financial plans, both in terms of how they will fund their retirement and also the legacy they will leave to loved ones. In particular, those who had intended passing on their pension wealth tax-free might be encouraged to re-evaluate what to do with this money if it is subject to IHT in the future.

Reportedly, some have reached the conclusion simply to spend their savings. Here, the choice to invest in holidays and experiences with family can provide an opportunity to create cherished memories while limiting the amount going to HMRC upon their death – although this does assume that affordability has been properly considered.

Rules around gifting

Meanwhile, others are likely to consider gifting as a vehicle for passing on wealth in a tax-efficient way. Under current rules, you can gift up to £3,000 each tax year without it being added to the value of your estate – this is known as your ‘annual exemption’. Any unused annual exemption can be carried forward to the next tax year, but only for one tax year.

Inheritance Tax is also typically not due on gifts between spouses and civil partners or gifts to charities or political parties.

In addition, IHT may not be due on gifts given seven years or more prior to your death – known as the seven-year rule. If, however, you die within seven years of making a gift and your estate is over the tax-free threshold, then IHT applies at 40% for gifts given in the three years before death, and then at a sliding scale (known as ‘taper relief’) for gifts given between three and seven years earlier.

Providing financial support to family through gifting can allow an individual to offer valuable help towards major purchases, such as housing. Indeed, parents gifted an estimated £9.6 billion in 2024, research has revealed, with first-time buyers receiving an average of £55,572 to help them onto the property ladder.

Considering your options

A less commonly used approach, which is not impacted by the seven-year rule, is to provide gifts out of surplus income. If specific criteria are met, this can facilitate the transfer of wealth without incurring IHT, and could, therefore, become a more appealing option for those considering how best to support dependents while reducing the tax liability of their estate.

Like many aspects of estate planning, however, this can be a complex area to navigate. Furthermore, it is worth noting that the government is still consulting on the proposals set out in the Chancellor’s Autumn Statement, with no specific guidance available on how any changes will be implemented and, therefore, how an individual’s pension savings might – or might not – be affected.

With less than two years to go, getting reliable advice from a professional adviser ensures you can fully understand how you might be impacted, giving you a chance to consider all the options available and begin putting in place a plan that’s focused on delivering the inheritance you intended.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.