More families than ever are caught in the UK inheritance tax net and tax bills keep rising. With the thresholds frozen for another six years and pensions set to form part of your estate, what can you do to protect your family and heirs from this death tax?
UK inheritance tax (IHT) receipts have been on an upward path for 20 years, a trend which is expected to accelerate over the coming years. HM Revenue & Customs figures reveal that the inheritance tax collection for the first seven months of this tax year hit £5 billion—half a billion more than the same period last year and yet another record high. The government reaped £776 million from IHT in October alone, a 66% increase for that month in just three years.
Inheritance tax receipts totalled a record £7.5 billion for the 2023/24 tax year and are set to breach £8 billion this tax year, possibly up to £8.5 billion. Currently, one in 20 people (5%) pays UK inheritance tax, but this is expected to almost double to 9.5% by 2030.
Higher property values and the long-term freeze on IHT thresholds are the main causes.
When the time comes, what will your estate’s tax bill be? How much of your wealth can benefit your family and heirs, and how much will go to the taxman?
Inheritance tax reforms on the way
What is particularly concerning is that the 11% increase in receipts from April to October occurred before the new inheritance tax measures announced in the budget are implemented. The following reforms will considerably increase IHT receipts for the government.
Inheritance tax thresholds
The freeze on inheritance tax thresholds has been extended again, from April 2028 to 2030. The main nil rate band has remained at £325,000 since 2009. If it had risen in line with inflation, it would now be approximately £500,000. The residential nil rate band for homes passed directly to children and grandchildren has been frozen at £175,000 since 2021. It would be around £210,000 if it kept pace with inflation.
Agricultural and Business Property Reliefs
The agricultural relief and business property relief will become much less generous starting in April 2026. Currently, qualifying assets can receive relief of up to 100%, but from April 2026, this relief will only apply to the first £1 million of combined agricultural and business property. A 50% relief will apply to assets above this, effectively reducing the IHT rate from 40% to 20%.
AIM shares
For now, qualifying AIM (Alternative Investment Market) shares are exempt from inheritance tax once you have owned them for two years. From April 2026 they will be subject to inheritance tax, at a reduced rate of 20%.
Pensions to lose IHT exemption
While inheritance tax is assessed on most of your worldwide wealth, most pension funds are excluded. But in a significant change impacting many families, from April 2027, inherited pensions will be liable for inheritance tax. This is in addition to the income tax levied on the beneficiary, so when your heirs receive the balance of your fund, they could pay an effective total rate of 67% if you die after the age of 75.
Inheritance tax and expatriates
Inheritance tax has been determined by domicile status, rather than tax residence status. Therefore, British expatriates remain liable for this UK tax on their worldwide assets long after leaving the UK, often permanently.
This comes to an end on 6 April 2025, when the domicile regime will be replaced by a system based on long-term residence. Expatiates and those leaving or returning to the UK will have more certainty about their tax position, and many will benefit from the reform.
Leaving the UK: You will remain liable for inheritance tax on non-UK assets for up to 10 years, depending on how long you lived in the UK before departing; for most UK nationals retiring abroad, it will be the full 10 years.
Moving back to the UK: Once you have been resident in the UK for at least 10 out of the last 20 years, your worldwide estate will be assessed for inheritance tax.
UK assets: Under both the domicile and residence systems, any assets you own in the UK are always assessed for inheritance tax, regardless of how long you live abroad. From April 2027, this will include your UK-registered pension funds.
Organise your estate planning in the most tax-efficient possible.
Protect your family
Strategic estate planning has become more urgent if you want your family to benefit from as much of your estate as possible. Each year, more and more families fall into the inheritance tax net, and this will escalate when pensions are included. If you already have an estate plan in place, you may need to revise it following the budget.
Make sure to structure your estate to optimise the available reliefs and to maximise the ability to transfer unused nil rate bands to your spouse or civil partner. Potentially exempt gifts (PETs) may work for your family, but once you give an asset or money away, you lose control over it, so be certain it is the right option for you.
Expatriates in countries like Spain also have to contend with the local succession tax. Remember though, that your UK assets remain in scope for UK inheritance tax regardless of your local inheritance tax situation. Perhaps now is the time to think about moving them out of the UK.
Estate planning is complex. Professional financial advice will be incredibly beneficial to ensure your estate is managed efficiently, your wealth is transferred according to your wishes, and your loved ones receive the maximum possible inheritance.
Blevins Franks has decades of experience advising wealthy UK residents and British expatriates on their estate planning. Our tax, succession, trust and pension specialists carefully analyse new legislation to establish effective solutions for our clients. Our personal approach ensures that our advice is tailored to meet your specific requirements and that you enjoy an ongoing service for as long as you, or your heirs, need us.
Contact us today.
