Inheritance tax (IHT) takings hit a near-record high last month as frozen thresholds drag more families into the net.
In the nine months from April 2024 to January 2025, HM Revenue and Customs (HMRC) received a staggering £7billion in IHT receipts – an increase of £0.7billion compared to the same period the year before.
The tax-free (nil-rate) threshold has been frozen at £325,000 since 2009 despite soaring house prices and inflation, and it is set to remain until 2030. With the planned inclusion of pensions in people’s taxable estates from 2026, the Office of Budget Responsibility (OBR) forecasts annual receipts to reach £9.7billion in five years.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The inheritance tax creep crawls ever higher, hitting £7billion so far this tax year. This puts it well on track to surpass the £7.5billion record that it hit a year earlier. With Government plans to include pensions in the net for inheritance tax from 2027 and thresholds remaining frozen, the tax take is only going to get higher.”
However, the retirement expert noted there are things people can do to try and reduce an inheritance tax bill, adding: “We expect people will start to take action sooner rather than later.”
Gifting
Gifts of any size fall out of people’s estates after seven years. Ms Morrisey said: “We can expect to see people start to gift assets to loved ones now so they can start the countdown ticking.
“We will also likely see people start to use the various gifting allowances available – such as the £3,000 annual exemption – to reduce the size of their estate.”
Anyone can make a gift of up to £3,000 a year to another person using their annual exemption. Married couples or civil partners can gift up to £6,000 between them, or even £12,000 if they haven’t used their £3,000 allowance in the previous year.
In addition, small gifts of up to £250 and gifts out of excess income can be made to anyone free of inheritance tax.
People can also make gifts of between £1,000 and £5,000 (depending on the relationship to the giftee) for marriage or civil partnerships.
Ms Morrissey added: “Gifting out of excess income will also prove popular.”
People can gift “excess income” beyond the £3,000 limit as long as these gifts are regular, they intend to keep making them, and they can show the money isn’t needed to maintain their lifestyle. These gifts have no set limit, as it depends on the person’s income and personal needs.
Ms Morrissey said: “It’s really important that detailed records are kept as gifts need to be proved to be made regularly and out of your surplus income to meet the rules.
“You also should not reduce your own standard of living to maintain these gifts – this is a really important point as you don’t want to be in a position of needing to ask for gifted money back because you can no longer afford to give it.”
Write a will
According to Jonathan Halberda, a specialist financial adviser at Wesleyan Financial Services, said, having an up-to-date will is one of the “most effective ways” to ensure an estate is distributed according to a person’s wishes.
He said: “Without a will, you have no say over who inherits what or how much Inheritance Tax may have to be paid.
“By making a will and reviewing it regularly, you can take advantage of all the exemptions and allowances that can help you keep your Inheritance Tax bill as low as possible.”
Try a trust
Another way to reduce an inheritance tax liability is to put some assets into a trust.
Mr Halberda explained: “This means they technically don’t belong to you anymore, so they aren’t counted as part of your estate.
“A trust is a legal arrangement where assets are held by a trustee or group of trustees for the benefit of someone else, but you can still control how, when and to whom the money is paid.”
