According to a recent This is Money report, nearly three-quarters of people (71%) don’t know how Inheritance Tax (IHT) works. That includes having no idea of the liability they might leave behind when they die.
This is especially worrying in the context of the rising IHT receipts, with the Treasury collecting £8.2 billion from the tax between April 2024 and March 2025. The figure marked an £800 million increase in 2023/24.
What’s more, these figures are expected to keep rising. Not least because IHT thresholds are currently frozen until 2030 and pensions are due to be brought into the IHT net from 2027.
So, how does IHT work and how worried should you be about leaving a potential bill for your loved ones?
Keep reading to find out.
While many Brits are aware of Inheritance Tax, few know how it works
This is Money, publishing the results of a Schroder’s survey, report that while 77% of Brits are familiar with the concept of IHT, 71% admitted that they:
- Don’t understand how the tax works
- Are unsure what their beneficiaries might pay.
Worryingly, more than 40% of those surveyed don’t currently have a will in place. A further 40% see IHT and estate planning as the “last great family taboo”, highlighting the importance of communication.
IHT is generally paid at 40% of the value of a deceased’s estate that exceeds certain IHT thresholds.
The nil-rate band currently stands at £325,000, but an additional £175,000 allowance (known as the “residence nil-rate band”) can be applied to those passing their home to a direct descendent.
It’s also possible for unused nil-rare bands to pass to a spouse, which could mean an estate is effectively IHT-free up to £1 million.
IHT is paid by a small percentage of estates, but this number is expected to rise
Despite often being referred to as “Britain’s most-hated tax”, in reality, it is paid by relatively few estates.
Just 4% of estates currently pay IHT, but this number is expected to rise in the future.
The previously mentioned nil-rate band has been frozen at £325,000 since way back in 2009. That’s 16 years! It’s sure to remain at this amount until 2030.
The residence nil-rate band, meanwhile, was only introduced in 2017 but has been at its current level since 2020. It is also currently frozen until at least 2030.
During this time, the value of your savings and investments, and the price of your house, will likely have risen. It stands to reason then, that more and more estates have breached the IHT thresholds.
This will only become more of an issue from 2027 if Labour’s plans to bring pensions under the IHT net come to fruition. Even then, though, only 8% of UK estates are expected to become liable for IHT.
You might not need to worry about IHT, but you should be prepared
Estate planning remains a difficult discussion topic within families. Dwelling on your own mortality isn’t easy and thinking about the inheritance they might receive when you’re gone can be difficult for your loved ones too. But communication is vital.
According to Schroder, around a third (34%) of us rarely or never discuss our finances with family.
At Jane Smith, we’ve recently written about the rise of gifting while living and how leaving a living legacy means that you’ll still be around to see the difference your money makes. This strategy also provides the perfect opportunity to discuss your legacy.
It’s important to think about a potential IHT bill so that you take mitigation actions now. Gifting during your lifetime can lower the value of your estate and could see it drop below the level where IHT would become payable.
Understanding how much they might reach and when is also incredibly useful for loved ones who can begin to make plans. You might be able to give gifts now to help them onto the property ladder for example.
The discussion now also helps to manage expectations and could make will disputes much less likely after you’re gone.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, or will writing.
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