The taxman is sneaking up on Britons, with an increasing number of contributors dragged into paying inheritance tax (IHT) by stealth.
From April 2024 to March 2025, HMRC has amassed a record £8.2bn worth of IHT – £800m more than in the previous 12 months. The increase is considerably higher than the 2023/2024 rise, which amounted to £100m.
The taxman’s takings will continue to increase until 2030 due to ‘fiscal drag’, after chancellor Rachel Reeves extended the freeze on IHT thresholds in her Autumn Budget.
Levied on estates upon death, IHT is charged at 40% of an individual’s estate over the £325,000 nil rate band and the £175,000 residence nil rate band – both of which are frozen until 2030.
The freeze is not a tax increase per se, but as estates get larger over time and a smaller portion is covered by the allowance, more of the estate becomes subject to IHT, said Shaun Moore, tax and financial planning expert at Quilter.
“With several years of the freeze remaining, an increasing number of families will find themselves needing to pay often hefty tax bills. What was once viewed as a tax on only the wealthiest of families has spread to middle-income families, many of which may not even realise they are affected,” he said.
“Property prices have grown rapidly in recent years, particularly in areas such as London and the South East, which in many cases will leave little to no room for additional assets to be left to loved ones before the tax is applied.”
With tax bills becoming “increasingly difficult to mitigate”, as Moore said, Trustnet asked financial advisers for their tips to prepare for when the taxman knocks.
Assess what you will have to pay
Moore said the first thing to think about is how much will be owed, then figure out ways to lessen the burden. “Understanding exactly what your estate does and does not include from an IHT perspective will be key,” he said.
“The recent announcement that pensions will be brought into scope on the value of your estate from 2027 may need to be considered now, and could result in adjustments to your plans going forward.”
Establish a trust
Gush Verdding, chartered financial planner at Finura, suggest establishing a trust for life insurance as “an effective way to mitigate IHT”.
If the life policy is part of one’s estate, it increases the value of the estate, potentially pushing it over the IHT threshold of £325,000 (plus allowances), leading to more tax (at 40%) on the value above the threshold.
“Assign any life policies in trust, otherwise the sum assured just increases your overall estate and is liable to lengthy probate before being paid out to beneficiaries,” Verdding said.
All of this is skipped if the payout is held in trust, when the life insurance goes directly to the trustees, who then pass it on to the beneficiaries.
“Earlier planning will result in cheaper monthly and annual premiums, given premiums will only increase in line with age,” he added.
Make sure all your admin is up-to-date
Making sure your will is up-to-date is “essential”, Moore said – as is ensuring that the nil rate band and residence nil rate band, where applicable, are maximised. “Utilise any exemptions available, such as the spousal exemption,” he added.
He also urged people to keep on top of their filing, record-keeping and financial admin. “Keep a detailed record of your financial decisions in life, particularly in the case of any gifts, which will make determining any IHT liability when you pass a much smoother process,” he said.
He also recommended keeping details such as the name and contact details of financial advisers, bank accounts, savings and investments somewhere accessible.
Use gifts savvily
Annual gifting exemptions amount to £3,000 per person and Ruairi Dennehy, chartered financial planner at Dennehy Wealth, reminded savers to make use of last year’s allowance if it wasn’t taken advantage of.
“With the Junior SIPP allowance of £2,880, maybe gifting straight into a grandchild’s SIPP is a savvy way to shelter money from HMRC while concurrently saving money for your family’s future,” he said.
On top of that, gifting out of regular surplus income has no upper limit, which goes under the ‘normal expenditure out of income’ rule, Dennehy stressed. “Retirees with excess annuity or defined benefit income are those who could look to take advantage of this rule,” he said.
As long as the gifts don’t reduce one’s standard of living, are regular and out of income rather than capital, they aren’t taxed – a “hugely beneficial exemption”.
Utilise IHT-efficient investments
Investing in Business Property Relief (BPR) assets can reduce or eliminate IHT if held for two years. BPRs are portfolios of small, trading UK businesses that qualify for tax exemptions of up to 100%.
Enterprise Investment Schemes (EIS) are a kind of BPR with additional advantages, including 30% income tax relief upfront and capital gains tax deferral. This means the tax on any capital gains (deriving from selling shares or property, for example) can be deferred by reinvesting those gains into an EIS.
Dennehy mentioned Octopus and Downing as providers of ready-made BPR investment products – the latter offers it through its Estate Planning Service and the former through its Inheritance Tax Service.
Spend the money
Finally, spending money on something both you and your family can enjoy together is another great way of passing down your wealth, Verdding concluded.