The revenue from inheritance tax (IHT) in the United Kingdom has reached unprecedented levels, with expectations that this figure will only escalate in the future due to recent fiscal adjustments.
In the nine-month period leading up to the close of December, HM Revenue and Customs (HMRC) reported a staggering £6.3 billion (€7.5 billion) generated from IHT—representing a £600 million (€710 million) increase over the same timeframe last year.
This surge can be largely attributed to an expanded base of estates now subject to inheritance tax, a shift driven in part by the government’s decision to lock the tax thresholds in place.
Currently, IHT is levied at a rate of 40% on the value of estates exceeding £325,000. The government has pledged to keep this threshold frozen until 2030, which will result in a higher number of individuals facing IHT as their assets become increasingly inflated due to inflationary pressures.
An additional factor propelling this growth is the trend of escalating wealth accumulated in later stages of life, coupled with the fact that more estates are falling into the IHT bracket.
The booming wealth pool has been significantly enhanced by rising real estate values and the solid performance of various investment portfolios.
Pension Pot Taxation on the Horizon
The outlook for inheritance tax receipts remains robust, with forecasts pointing to a pronounced increase in the coming years. David Sturrock, senior research economist at the Institute for Fiscal Studies, suggests that the latest budgetary policies will only exacerbate this growth.
“Recent policy shifts, particularly the integration of pension pots into taxable estates starting in April 2027, will undoubtedly contribute to an increase in inheritance tax receipts,” he told Euronews.
Under current legislation, unused pension pots are exempt from inheritance tax when passed down to beneficiaries, though certain taxes may apply if the deceased was over 75. However, the ruling Labour government is poised to amend this exemption, incorporating pension assets into taxable estates, which will inevitably elevate the overall value subject to tax.
Steven Levin, CEO of wealth management firm Quilter, voiced concerns over this impending shift, predicting considerable difficulties for grieving families. “The proposal to subject unused pension funds to IHT will lead to significant challenges for families already coping with loss. Executors will be burdened with managing valuations, paperwork, and inheritance tax on pensions alongside other assets,” he said. He further suggested a simpler solution in the form of a flat-rate tax on unused pension funds after an appropriate ‘nil rate band’ threshold has been established.
The ‘nil rate band’ refers to the portion of an estate’s value that remains exempt from IHT.
Adjustments to Agricultural and Business Property Relief
In addition to changes concerning pension pots, the government has announced alterations to agricultural property relief, which caused widespread discontent among farming communities last year.
In October, Finance Minister Rachel Reeves revealed plans to apply a 20% inheritance tax on farms valued at over £1 million (€1.2 million), effective from April 2026. Historically, agricultural properties had been exempt from such levies, a longstanding privilege now set to be revoked.
“Investors must also stay alert to shifts in business property relief,” cautioned Sarah Coles, head of personal finance at Hargreaves Lansdown. “Under the new proposals, AIM-listed shares will no longer be exempt from inheritance tax, facing a 20% levy instead. AIM, a market within the London Stock Exchange, primarily caters to smaller, riskier, or high-growth businesses.”
These tax revisions are poised to reshape the landscape for many estates, bringing more assets into the IHT net and affecting a broader range of individuals and businesses across the UK.
This article was originally published on euronews. Read the original article.
FAQs
What is the current inheritance tax threshold in the UK?
The current threshold for inheritance tax in the UK is £325,000, above which estates are taxed at 40%.
How will the freeze on inheritance tax thresholds affect estates?
The freeze on thresholds means that more estates will be liable for IHT as asset values increase, pushing more estates over the £325,000 limit.
When will pensions be taxed under inheritance tax in the UK?
Starting in April 2027, unused pension pots will be considered part of the estate for inheritance tax purposes.
What changes are being made to agricultural property relief?
Starting in April 2026, agricultural estates worth over £1 million will be subject to 20% inheritance tax, a significant shift from previous policy.
How can families prepare for the changes to inheritance tax laws?
Families should consult with financial advisors to understand the impact of these changes and plan accordingly to manage potential inheritance tax liabilities.