High-value inheritance taxes are paid by nearly one in ten estates, amounting to more than £500,000 each.
Rising Inheritance Tax Bills in the UK: What You Need to Know
In the UK, a growing number of estates are facing unexpectedly high inheritance tax (IHT) bills due to recent and upcoming legislative changes. These changes primarily affect the scope of assets subject to IHT, particularly unused pension funds and changes to domicile rules.
- Inclusion of Unused Pension Funds in IHT
From 6 April 2027, unused pension funds and pension death benefits will be included in the value of the deceased's estate for IHT purposes. This change significantly increases IHT liabilities for estates with inheritable pension wealth. It's estimated that about 10,500 estates will become newly liable for IHT, and roughly 38,500 estates will pay more tax than before, with the average additional liability around £34,000 [1][2][4].
- Removal of Domicile Considerations, Shift to Long-Term Residency
From 6 April 2025, non-UK situs assets will be subject to IHT based on the individual's long-term residence status (being UK resident for at least 10 of the previous 20 tax years), rather than domicile status. This broadens the number of estates liable to IHT on non-UK assets [3].
- Other Legislative Adjustments
Changes remove certain exemptions, such as those related to pension rights that were previously outside IHT, and tighten rules around asset transfers.
To reduce or avoid high inheritance tax bills, individuals and families can consider several strategies:
- Utilizing Nil-Rate Bands and Residence Nil-Rate Band
There is a nil-rate band of £325,000 and an additional residence nil-rate band of £175,000 (total £500,000 under certain conditions) that reduce the taxable estate [4].
- Passing Assets to Exempt Beneficiaries
Transfers to a spouse, civil partner, charity, or registered club remain exempt from IHT [1][4].
- Gifting During Lifetime
Removing assets from the estate by gifting them outright (potentially subject to seven-year rules and other conditions) can reduce IHT exposure.
- Using Trusts and Other Vehicles
Certain trusts and financial arrangements can provide effective estate planning tools, though these are complex and require professional advice.
- Early Pension Drawdown and Planning
Since pension funds will be subject to IHT from 2027, individuals may consider careful planning around withdrawing pension benefits sooner or restructuring pension investments, always under professional guidance [1][2].
- Professional Advice and Reporting Preparation
Given new reporting requirements with inheritable pension wealth, working with trusted advisers helps manage compliance and optimize estate tax outcomes [1].
Overall, rising IHT bills reflect legislative tightening designed to capture wealth held in pensions and non-UK assets. Effective mitigation increasingly requires proactive, informed estate planning tailored to individual circumstances and often professional advice.
The Increasing Risk of High Inheritance Tax
The heightened inheritance tax risk from pensions means it is increasingly vital for families to engage in effective financial planning. The total number of people who face a tax bill of half a million pounds or more could dramatically increase in the coming years due to inflation and frozen tax brackets.
In the 2021 to 2022 tax year, nearly one in ten estates liable for inheritance tax received a bill of £500,000 or more. The steady rise in house prices and asset values means more estates are being taken above the inheritance tax threshold due to thresholds not keeping pace with inflation.
If the trend continues, an estimated 3,524 estates will have to pay over £500,000 in inheritance tax by the end of the 2025/26 tax year. Of the 2,520 estates liable for over £500,000 in tax, 890 were liable for more than £1 million.
The residential nil-rate band adds an extra £175,000 to the nil rate band if you leave your house to your direct descendants, meaning you could leave a home worth up to £500,000 without incurring inheritance tax.
- [1] Rathbones, "Inheritance Tax and Pensions: The Impact of the Lifetime Allowance Changes"
- [2] Pension Policy Institute, "The Impact of the Lifetime Allowance Charge on Pension Wealth"
- [3] HM Revenue & Customs, "Non-Resident Capital Gains Tax Manual"
- [4] GOV.UK, "Inheritance Tax: The Basics"
- In light of the upcoming changes, it's crucial for individuals to pay attention to the incorporation of unused pension funds and pension death benefits in the inheritance tax (IHT) calculations, as doing so could result in significant IHT liabilities for estates with inheritable pension wealth.
- The removal of domicile considerations and shift towards long-term residency status will broaden the number of estates liable to inheritance tax (IHT) on non-UK assets, beginning from 6 April 2025.
- To minimize the risk of high inheritance tax (IHT) bills, various strategies can be employed, such as utilizing the nil-rate bands and residence nil-rate band, passing assets to exempt beneficiaries, gifting during lifetime, using trusts and other financial vehicles for estate planning, planning for early pension drawdown, and working with trusted advisers to manage compliance and optimize estate tax outcomes in light of the new reporting requirements with inheritable pension wealth.
