Even before the election last year of a new UK government, the revenue raised from inheritance tax rose as the government kept the threshold – "nil-rate band" - fixed. That policy has continued, and turned more severe, with family-owned farms and businesses in the mix, along with inherited private pensions.

Six months on from the 31 October 2024 annual UK Budget, in which Chancellor of the Exchequer Rachel Reeves stirred controversy by cutting inheritance tax (IHT) reliefs from family-owned farms and businesses, and held thresholds in place until 2028, IHT continues to rake in more revenue.

New figures from HM Revenue and Customs, the UK tax authority, showed that IHT receipts from April 2024 to March this year stood at £8.2 billion ($10.9 billion), £800 million more than the same period 12 months before, or an 10.8 per cent increase.

With UK public finances under strain from a sluggish economy – arguably made worse by Reeves’ hikes to employers’ payroll taxes and new UK labour market regulations – there will be more pressure on the government to inrease taxes on affluent people, or the wider population more broadly. One fear, advisors say, is that the ability of people to reduce IHT bills by gifting wealth seven years before death could be squashed by an end to this route.

Rising IHT bills, including the extension of IHT scope to private pensions that are inherited, combined with the end to the UK’s resident non-domicile system and other changes, means that there has been increasing talk of high net worth individuals wanting to quit the UK for more tax-friendly shores. In turn, such an exodus squeezes the tax base, piling more pressure on remaining taxpayers.

The inheritance tax threshold, which is charged at 40 per cent above a threshold of £325,000 ($422, 000), will stay frozen until April 2028; inherited pensions will be brought into inheritance tax from 2027, however. Controversially, IHT now applies to estates of farms worth more than £1 million, sparking protests across the country. The treatment of inherited pensions means that when income tax is also deducted from the remaining pot, the effective tax rate on an inherited pension is 67 per cent. Agricultural and business property business relief will also be reformed with assets over £1 million facing a 20 per cent rate. A 50 per cent relief will be applied in all circumstances on inheritance tax for shares on the Alternative Investment Market (AIM).

“The inheritance tax take for the Treasury has notched up another record financial year. That’s a trend that is unlikely to change as long as nil-rate bands remain frozen, which is currently until at least 2030,” Ian Dyall, head estate planning at wealth management firm Evelyn Partners, said. 

“Even with market turbulence like we have seen recently, long-term increases in asset values tend to draw more estates across the IHT thresholds, and the inclusion of unspent pension funds in IHT liabilities from April 2027 – along with the dilution of agricultural and business reliefs next year – will give that trend a big leg up,” Dyall said. 

Shaun Moore, tax and financial planning expert at Quilter, said: “IHT has long since been a deeply unpopular tax, and its reputation is unlikely to improve any time soon. 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.

“Tax bills are becoming increasingly difficult to mitigate, and this will only worsen as the freeze on the various thresholds continues and as policy changes set in. Seeking professional financial advice will be key to ensuring no more of your money goes to the taxman than is absolutely necessary,” Moore said. 

Laura Hayward, tax partner at professional services group S&W, said: “The big change is that from April 2027, pensions fall into estates for IHT purposes. If this pushes estates above £2 million, it can take someone from having a low IHT tax exposure to a high one. This is because the taper for the residence nil rate band kicks in for estates over £2 million, which means taxpayers face the double whammy of IHT on their pensions while also losing some or all their residence nil rate band.

“In addition, the government has announced significant changes to IHT on assets qualifying for business and agricultural property relief. From April 2026, there is a £1 million lifetime allowance across business property relief and agricultural property relief for those assets qualifying for 100 per cent relief (plus lifetime gifts from 30 October 2024 where the person giving the gift dies on or after 6 April 2026). The balance of qualifying assets will be eligible for 50 per cent relief. AIM shares will qualify for relief at 50 per cent rather than 100 per cent when held for more than two years.

“Ahead of these upcoming changes to IHT, clients are increasingly asking how they can most effectively make gifts to family members or invest tax-efficiently to help reduce or eliminate IHT bills. Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years. We know that many families want to ensure that gifts are used in a responsible way which can make setting up trusts an effective tool for tax efficiently passing on assets to the next generation in a controlled way.

“Given the state of the UK’s finances, speculation is rife that the Chancellor will need to look again at increasing taxes at the Autumn 2025 Budget and could consider making further changes to IHT. Some worry there is potential for the seven-year gifting rule to be scrapped or lengthened. This backdrop of uncertainty provides added urgency for families to look at their tax planning position before any further possible changes are announced,” she added.