Last month, HMRC reported that it had collected £7.1 billion in inheritance tax (IHT) receipts during the first 10 months of the current tax year—an increase of around £130 million compared to the same period last year. This continues a clear upward trend, with annual IHT revenues consistently surpassing the record set the year before.
Looking ahead, the Office for Budget Responsibility (OBR) forecasts that inheritance tax receipts could reach £14.5 billion by the 2030–2031 tax year—almost double current levels.
What’s Driving the Increase?
One of the main reasons behind this steady rise is the long-term freeze on key tax-free allowances. The Nil Rate Band (NRB) has remained at £325,000 since the 2009–2010 tax year, while the Residence Nil Rate Band (RNRB) has been fixed at £175,000 since 2020–2021.
Over time, inflation has significantly eroded the value of these thresholds. According to estimates from the Bank of England, £325,000 in 2009 would be worth more than £520,000 today. As asset values—particularly property—have increased, more estates are being pulled into the inheritance tax net.
Further changes are also on the horizon. From April 2027, pensions will be included as part of an estate for IHT purposes. This means assets that were previously outside the scope of inheritance tax will soon become taxable.
Who is Affected?
At present, only around 5% of estates are subject to inheritance tax. However, if allowances remain frozen while asset values continue to rise, many more people could be affected in the coming years.
This makes it increasingly important to understand how much you can pass on tax-free—and how to make the most of available allowances.
Understanding Your Tax-Free Allowances
Every individual is entitled to a £325,000 tax-free allowance, known as the Nil Rate Band (NRB). Any portion of an estate above this threshold is taxable. For example, if an estate is worth £350,000, only £25,000 would be subject to inheritance tax.
In addition to the NRB, there is the Residence Nil Rate Band (RNRB), which provides an extra £175,000 allowance when a main residence is passed on to direct descendants, such as children or grandchildren.
It’s important to note that the RNRB applies only to your primary residential property. If the value of the property is less than £175,000, any unused portion of the allowance cannot be applied to other assets. Additionally, this allowance is not available if the property is not passed to direct descendants.
You should also be aware of the RNRB taper, which comes into effect if an individual’s net estate is worth more than £2 million. This taper reduces the amount of RNRB you can claim by £1 for every £2 your estate exceeds the £2 million threshold, meaning that an estate worth £2.35 million will not be able to claim any RNRB.
Benefits for Married Couples and Civil Partners
Transfers between spouses and civil partners are exempt from inheritance tax. This means that when one partner passes away, any assets left to the surviving partner are not subject to tax.
Additionally, any unused NRB and RNRB allowance can be transferred to the surviving spouse or civil partner. As a result, couples can combine their allowances, potentially benefiting from:
A combined NRB of £650,000
An additional £350,000 through the RNRB (if passing property to direct descendants)
In practice, this means that a couple could pass on up to £1 million tax-free, provided they meet the necessary conditions—owning heritable property and leaving it to their children. This is substantially more than a single person not passing on to direct descendants, as they only have an allowance of £325,000 to work with.
Final Thoughts
With inheritance tax receipts continuing to rise and more estates likely to be affected in the future, proactive planning has never been more important. Understanding your allowances and how they apply to your estate can make a significant difference to how much you’re able to pass on to your loved ones. You may also want to consider gifting to pass on your estate before your death and reduce your IHT liability. Gifting has its own set of IHT rules that you should be aware of. Please see one of our previous posts for more details.
If you are unsure how these rules apply to your situation, contact our Private Client department, and someone will be able to assist you.
