Inheritance tax (IHT) receipts have soared to £5.7 billion between April and November 2024, according to figures from HM Revenue and Customs (HMRC). This represents a significant £600 million increase compared to the same period last year, with frozen tax thresholds and upcoming reforms cited as key contributors to this surge.
The Impact of Inheritance Tax Freeze and Fiscal Drag
The tax-free allowance for inheritance tax has remained frozen at £325,000 since 2009, a situation set to continue until 2030. Analysts argue that this freeze, against a backdrop of rising property prices and wages, has created a phenomenon known as “fiscal drag,” which effectively pulls more estates into the tax net.
Inheritance tax is levied at 40 % on the portion of estates exceeding the £325,000 threshold, though reliefs exist for certain categories, such as agricultural and business property. Yet, as the value of assets grows, more families find themselves liable for a tax once thought to affect only the wealthiest.
Key factors driving fiscal drag:
- Property value increases: Rising house prices have pushed more estates over the threshold.
- Static tax-free threshold: Frozen at £325,000, despite inflation and economic growth.
- Wage growth: Higher incomes lead to larger savings and asset accumulation, contributing to estate valuations.
Jonathan Halberda, a financial adviser with Wesleyan Financial Services, noted: “Another month, another increase in the Government’s inheritance tax receipts. Families should brace for even higher liabilities in the years ahead.”
Implications of Inheritable Pension Wealth on Inheritance Tax Liabilities
From April 2027, defined contribution pension pots will be included in inheritance tax calculations. This change, announced by Chancellor Rachel Reeves, is forecast to bring an additional 1.5 per cent of UK deaths into the IHT bracket.
In the 2027–28 tax year alone, 10,500 estates with inheritable pension wealth are expected to be impacted, with an average increase of £34,000 in inheritance tax liabilities. These reforms are projected to add significant revenue to government coffers, while raising concerns among those hoping to pass on pensions as part of their legacy.
Upcoming Reforms to Agricultural and Business Property Relief
Further reforms set to take effect from April 2026 will significantly alter the landscape for agricultural and business property relief. Under the new rules, 100% relief will be capped at the first £1 million of combined agricultural and business property. Any value above this threshold will only qualify for 50% relief.
This shift is likely to hit farmers particularly hard, with 38,500 estates forecast to face additional IHT charges. The changes have sparked widespread backlash, with farmers marching on Westminster to demand a reversal of the Chancellor’s decision. Many argue that the reforms risk undermining family farms and rural livelihoods.
Examples of potential impacts on farmers:
| Estate Value | Relief Before 2026 | Relief After 2026 | Effective IHT Rate |
|---|---|---|---|
| £2 million | £2 million (100%) | £1.5 million (75%) | 10% |
| £5 million | £5 million (100%) | £3.5 million (70%) | 18% |
| £10 million | £10 million (100%) | £6.5 million (65%) | 22% |
The Controversy Over Inheritance Tax Reforms: A “Stealth Tax Raid”?
Critics have described the combination of frozen thresholds and inheritance tax reforms as a “stealth tax raid,” accusing the government of increasing tax revenues by exploiting rising asset values. While the measures aim to boost Treasury income, they have left many families grappling with unexpected financial burdens.
The government, however, defends the changes as necessary for balancing the fiscal books and ensuring fairness in the tax system. The inclusion of pension assets, officials argue, aligns with efforts to modernise the inheritance tax framework and reduce loopholes.
Navigating the Future of Inheritance Tax: Planning for Increased Burdens
With the thresholds frozen until 2030 and property values unlikely to decline, the inheritance tax burden is expected to grow further in the coming years. For families, navigating these changes will require careful planning to mitigate their exposure.
Halberda warns, “People need to reassess their financial plans in light of these changes, as the cost of inaction will only rise.”
