Why more estates are paying Inheritance Tax
The amount collected through Inheritance Tax has risen significantly in recent years.
According to the Office for Budget Responsibility (February 2026), IHT receipts are expected to increase from £8.3 billion in 2024/25 to £14.5 billion by 2030/31.
One major reason for this is frozen tax allowances. While asset values continue to grow, the thresholds that determine how much you can pass on tax efficiently have remained unchanged.
As a result, more estates are becoming liable for IHT – even if they would not previously have exceeded the threshold.
What is the Inheritance Tax threshold?
The amount you can pass on without paying IHT is known as your ‘nil-rate band’.
As of the 2026/27 tax year:
- The standard nil-rate band is £325,000
- The residence nil-rate banned is up to £175,000 if you leave your home to direct descendants.
Combined, this means an individual may be able to pass on up to £500,000 tax-efficiently.
For married couples and civil partners, unused allowances can usually be transferred to a surviving spouse, potentially allowing up to £1 million to pass free from IHT.
Anything above the available threshold is normally taxed at 40%.
How estates over £2 million could lose tax allowances
One of the most important – and often overlooked – IHT rules affects estates worth more than £2 million.
Once your estate exceeds this threshold, your residence nil-rate band begins to reduce.
For every £2 your estate exceeds £2 million, you lose £1 of the residence nil-rate band. This taper continues until the allowance disappears entirely.
This means an estate valued at £2.1 million would lose £50,000 of the allowance and an estate worth £2.35 million or more could lose the full £175,000 allowance
For an individual, losing the full allowance could increase an IHT bill by up to £70,000. For couples, this could potentially rise to £140,000.
Frozen thresholds are pulling more estates into scope
The £2 million taper threshold has remained frozen since it was introduced in 2017 and is expected to stay unchanged until at least 2031.
If the threshold had risen with inflation, it would now be significantly higher.
At the same time property values have increased, investment portfolios have grown ad pension wealth has accumulated
As a result, more estates are likely to exceed the taper threshold in the coming years.
MoneyWeek (February 2026) reports that the number of estates worth more than £2 million could rise dramatically by 2030/31.
Pensions could increase your estate value from 2027
Another major consideration is the planned inclusion of unused pension funds within estates for IHT purposes from April 2027.
Previously, pensions were often viewed as an efficient way to pass wealth on outside your estate. However, future rule changes could mean unused pension wealth contributes towards your estate’s total value.
For some individuals, this may:
- Push estates above the £2 million threshold
- Reduce or remove the residence nil-rate band
- Increase the eventual IHT bill
This makes long-term estate planning even more important.
3 ways to potentially reduce an Inheritance Tax bill
Gift wealth during your lifetime
Gifting assets can help reduce the value of your estate and potentially lower an IHT bill.
In many cases:
- Gifts fall outside your estate after seven years
- Annual gifting allowances may apply
- Reducing estate value may help preserve your residence nil-rate band
However, it’s important to ensure gifting remains affordable and doesn’t affect your own financial security.
Leave part of your estate to charity
Leaving at least 10% of your net estate to charity could reduce your IHT rate from 40% to 36%.
In addition:
- Charitable gifts are exempt from IHT
- Donations can reduce the overall value of your taxable estate
- You can support causes important to you while improving tax efficiency
For some families, charitable giving forms an effective part of a wider estate planning strategy.
Consider using trusts
Placing assets into trust may help reduce the value of your estate for certain IHT calculations.
Depending on the type of trust used:
- Assets may no longer count towards the £2 million taper threshold
- Future growth may sit outside your estate
- Wealth can potentially be passed on more efficiently
However, trust rules can be complex, and transferring assets into trust is often irreversible. Professional financial and legal advice is usually essential before proceeding.
Why proactive estate planning matters
Inheritance Tax planning is no longer just a concern for the highly wealthy, as with frozen thresholds and rising asset values, more families could face substantial IHT bills in the future.
A proactive estate plan can help you:
- Preserve tax allowances
- Reduce unnecessary tax liabilities
- Pass wealth on more efficiently
- Protect more of your estate for future generations
Get support with Inheritance Tax planning
If you’re concerned about how Inheritance Tax could affect your estate, professional financial planning from Jordan FM could help you understand your options and create a tax-efficient strategy.
If you’d like support planning your estate and preserving more of your wealth for loved ones, please get in touch.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, Inheritance Tax planning, or trusts.
Recent Comments