07th May, 2025
Published in The Business Eye in April 2025.
HMRC has reported Inheritance Tax (IHT) receipts of £7.6 billion between April 2024 to February 2025 - a striking £800 million increase compared to the same period last year.
This rise is partially attributed to inflation which in turn over the long run has pushed up asset valuations, including property values. In contrast, the thresholds at which IHT is chargeable at 0% are set to be fixed until at least 2030, meaning in real terms, the thresholds are having a diminishing impact over time.
Following the Autumn 2024 Budget, IHT receipts are projected to rise even more significantly in the future. Chancellor Rachel Reeves announced notable Inheritance Tax reforms, particularly for business owners, agricultural holders and those with pension assets. Key measures include, but are not limited to:
Often, there is a common misconception that IHT only impacts super high net worth individuals. However, bearing in mind your home tends to be one of your largest assets, when coupled with the legislation changes mentioned above, more households are likely to exceed the frozen IHT thresholds in the future, potentially triggering a tax liability upon death.
Inheritance Tax is the tax levied on the value of an individual’s estate as at date of death. A UK domiciled individual’s estate will include all worldwide assets including cash, property, personal possession and investments minus any debt or liabilities. A notable exception are pension funds, which are excluded from the assessable estate and can be excluded from the calculation. However, as outlined earlier, this exemption will no longer apply from 6 April 2027.
IHT on death is charged at 40% but drops to 36% should 10% of the net estate be bequeathed to charity.
IHT is only chargeable on the value of the estate which exceeds unused tax-free thresholds (2025/26) as listed below:
*Broadly speaking, the RNRB is available to individuals who leave their home to children or direct descendants, subject to the value of the property and subject to tapering should the assessable estate exceed £2,000,000.
Any transfers between spouses and civil partners are exempt from IHT. Furthermore, upon demise, the first spouse can pass on any unused NRB or RNRB to the surviving spouse, meaning an effective IHT threshold of up to £1,000,000 for a married couple.
Other intricacies include assets that qualify for business or agricultural reliefs, which remain uncapped at present. However, as outlined earlier, these reliefs will be halved from 40% to 20% on assets above £1 million per individual from 6 April 2026.
At Davy, we can work with you to help you better understand your estate’s exposure to IHT
It will be the executors of your estate that will be tasked with paying any IHT due to HMRC by the end of the sixth month after the person died before distributing your residual estate to your beneficiaries. This effectively means that any Inheritance Tax payable will be taken from the inheritance of your loved ones or beneficiaries.
Should you die intestate (with no will in place) this can complicate matters, as under intestacy rules not all assets will necessarily be transferred to a surviving spouse. Dying intestate can trigger an IHT liability on first death and furthermore use up valuable nil-rate band allowances of the first spouse.
It may be the case that you are not concerned with any potential IHT liability that may arise on your demise. Your philosophy may be laissez-faire; not my problem, let my beneficiaries deal with it!
You could also elevate your lifestyle with travel and experiences while gradually reducing your assessable estate over time. However, any capital assets purchased will still remain subject to IHT.
Alternatively, you may wish to consider the following options which can help achieve your Inheritance tax planning goals either by mitigating or planning for the liability;
It should be noted that individuals will have different circumstances and objectives and the “one shoe fits all” approach is not appropriate when considering the above strategies.
IHT can potentially be mitigated, or the liability provided for through careful estate planning unlike other personal taxes including Income Tax or National Insurance. However, with the changes in the 2024 Budget, the path to mitigation is becoming more complex and nuanced.
At Davy, we can work with you to help you better understand your own potential exposure to IHT and the planning options available to you.
*Broadly, RNRB applies to individuals leaving their home to direct descendants, subject to the property value and tapering if the assessable estate exceeds £2,000,000.
WARNING: The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person.
WARNING: The information contained herein is based on our understanding of current tax legislation in the UK and the current HMRC interpretation thereof and is subject to change without notice. It is intended as a guide only and not as a substitute for professional advice.
