UK Inheritance Tax on the Rise, With Smaller Estates Also Affected
- TBA
- Jul 4
- 4 min read
As the UK Treasury recently confirmed the reinstatement of this year’s winter fuel allowance, expectations have grown for further tax rises in the upcoming autumn budget.
Since the new tax measures came into effect in April 2025, Chancellor Rachel Reeves’ drive to boost Treasury revenue has started to deliver visible results.
In just the past month alone, HMRC collected nearly £800 million in inheritance tax (IHT), marking the second-highest monthly figure ever recorded. According to recent forecasts, inheritance tax revenue is expected to exceed £9 billion in the 2025/26 financial year—an all-time high.
This trend reflects not only a tightening of tax policy but also raises serious concerns about intergenerational wealth transfer for many families.
More families dragged into the inheritance tax net
Current data shows that the majority of estates subject to inheritance tax are, in fact, of relatively modest size—perhaps surprisingly so. This trend is directly linked to the Labour government’s decision to freeze the tax-free threshold for inheritance tax.
At present, the nil-rate band remains fixed at £325,000 and will stay frozen until 6 April 2028. Any amount above this threshold is taxed at 40%.
In a context of rising inflation and wage growth, this static threshold means more taxpayers are being pushed into higher tax brackets, increasing their effective tax burden. As a result, many families not previously considered wealthy are now being swept into the scope of IHT.
Pension and AIM stock exemptions under threat
From April 2027, pensions will become subject to inheritance tax—although the specific rules are still to be confirmed—adding a further layer of uncertainty to legacy planning.
In addition to this change, existing reliefs may also be reduced.
Currently, shares listed on the Alternative Investment Market (AIM) are exempt from inheritance tax. However, new proposals may reduce this relief by 50%, or eliminate it entirely.
This introduces potential complications for individuals using AIM stocks as part of their IHT planning strategy.
Inheritance tax has become a ‘cash cow’
Nicholas Hyett, investment manager at Wealth Club, pointed out that in the last 20 years, the UK’s inheritance tax revenue has grown from £3.3 billion to £8.2 billion.
This is prompting more families to seriously consider early planning for intergenerational wealth transfer.
With IHT rules becoming increasingly complex, lifetime gifting is emerging as an effective way to pass on assets, allowing families to benefit while the giver is still alive and potentially reducing future tax burdens.
One key rule you need to know about is the seven-year rule.
What is the seven-year rule?
The seven-year rule is a central principle in UK inheritance tax. It states:
If you gift a significant asset and die within seven years of the transfer, the value of that gift may still be counted as part of your estate and could be subject to inheritance tax (unless covered by available exemptions).
In other words, only if you survive seven years after making the gift will it become entirely exempt from inheritance tax.
According to HMRC, the following are considered gifts:
Cash or bank transfers
Property or land
Shares (both listed and certain unlisted stocks)
Personal items such as furniture, jewellery, and artwork
Aside from the £3,000 annual exemption, most other gifts fall into one of two categories: potentially exempt transfers (PETs) or chargeable lifetime transfers (CLTs).
Tax tapering – a partial relief if you don’t survive seven years
The good news is that even if you don’t survive the full seven years, you may still qualify for taper relief, which reduces the amount of inheritance tax payable depending on how long you lived after making the gift.
Time between gift and death | Effective tax rate |
0–3 years | 40% |
3–4 years | 32% |
4–5 years | 24% |
5–6 years | 16% |
6–7 years | 8% |
Recording gifts to avoid disputes
While HMRC may not automatically be aware of every gift made, your estate’s executor is legally required to declare all relevant gifts in the inheritance tax return.
For this reason, it is vital to keep accurate written records. Each record should ideally include:
Date of the gift
Value or estimated worth
Name of the recipient
HMRC’s official IHT403 form can be used to systematically record all lifetime gifts.
Protection options if your gift exceeds the tax-free allowance
If your total gifting exceeds your personal allowance (currently £325,000 per person), you may want to consider one of these insurance options:
Gift inter vivos policy
A decreasing-term life insurance policy
Pays the inheritance tax due on a gift if you die within seven years
Cover amount follows the taper relief schedule
Typically cost-effective
Level term assurance
Best suited for gifts within the tax-free threshold
Fixed cover for seven years
Pays out if you pass away during the policy term
Some advice from TB Accountants
As the UK tightens its tax policies—especially in the area of inheritance tax—it’s essential for families to take proactive steps in wealth transfer and estate structuring.
The key message is simple: the earlier you start gifting, the more potential there is for tax efficiency. Planning ahead isn’t just about saving tax—it’s about protecting your loved ones from future financial stress.
As the saying in the industry goes: intergenerational giving moves wealth where it’s needed most. Lifetime gifting isn’t about dividing assets early—it’s about careful planning and making informed choices.
Understand the seven-year rule, know the types of gifts that apply, and consider the impact of tax and appropriate protection strategies.
For individuals and businesses looking for UK taxation services, use our contact form to get in touch for more information.
Get in touch with us at info@tbgroupuk.com or for a free one-to-one consultation.
