Inheritance tax – Britain’s “most-hated” tax is often misunderstood

This year, Tax Freedom Day – the day when Britons stop paying tax and can keep what they earn – falls on 10^th June. The date has been getting progressively later year by year. It falls four days later than last year, and two weeks later than before the pandemic. There is another, under-the-radar tax that has seen a significant increase and is set to increase further - inheritance tax.

Figures released by HMRC showed IHT receipts of £780 million for April 2025. This is the second highest monthly total ever recorded and a rise of £97 million year on year. Tax receipts have been increasing as rising house prices and frozen tax allowances draw more people into the net through fiscal drag. Changing pension rules are likely to add to the total from 2027. The OBR forecasts that IHT receipts will hit £14bn by the end of the decade, from their current level of just over £8bn.

Read more: Inheritance tax planning requires a Budget rethink

IHT is often misunderstood

Part of the problem is that many people still have holes in their understanding of IHT and the steps they can take to mitigate it. In our latest Money Milestones’ research *, over 80% of consumers say they understand how IHT works, yet closer inspection shows there are areas that are poorly understood. Only a quarter (26%) say they understand IHT completely. This means they may make the wrong assumptions about their estate’s liability.

52% say they know how much IHT will be payable in the event of their death. The research shows that for those with smaller estates, it tends to be over-estimated. 55% of those with an estate valued between £100,000 and £325,000 (i.e. below the nil rate band) believing there will be tax to pay.

Read more: how does inheritance work?

However, more worryingly, the research also shows that those estates that have an active IHT liability (39%), tend to underestimate their potential bill. Of those whose estate is valued at between £325,001 and £750,000, 52% say they know what IHT will be payable in the event of their death, but the mean estimate is £55,625. Of those who have an estate valued more than £750,000, 39% have no idea how much will be payable on their estate. That could leave their heirs with a nasty and unexpected bill.

Building a better understanding

As the IHT net expands, many people will need to build a better understanding of their liability. Around 10% of estates are likely to pay IHT by 2030, rather than the current level of 5%. Even that level assumes there are not significant changes to the current rules, which – with a cash-strapped government – remains a possibility. Cuts to the existing £325,000 nil-rate band are plausible. Equally, if there were to be significant rises in property prices or wages, more estates could be liable for IHT.

Starting planning early is vital and will give you the maximum range of options to mitigate IHT. First and foremost, you will need a will. Making a will won’t, of itself, get rid of an IHT problem, but it is a starting point in distributing your assets effectively. Many people assume that if they don’t make a will, their estate will be divided up between their family in an equitable way. This isn’t necessarily the case. If there is no will, the assets are divided according to the laws of intestacy, which are complicated and may not be in line with your wishes.

Looking at the overall level of your assets to get an idea of your potential liability is important, and the earlier you can do this the better. If you leave IHT planning to the last minute, there isn’t a magic trust, or investment that is going to help your heirs avoid tax. There are options, such as investing in AIM shares. These are subject to IHT at 20% rather than 40% (from April 2026), but investors still need two years of qualifying ownership.

The most effective tool for IHT mitigation is gifting assets. This can be through the £3,000 annual gifting allowance, through ‘regular gifts out of income’ (whereby you can give away as much as you like as long as you can prove it doesn’t diminish your standard of living) or through ‘potentially exempt transfers’ – these are transfers of wealth that are exempt from IHT as long as you survive seven years after making them. Regular gifts can remove assets permanently from your estate and the earlier you can start this process, the better.

IHT is becoming an issue for a greater number of households. There are signs that many people are still unsure about how much they will have to pay and what they can do to mitigate it. Recognising you may have a liability is the first step.

Research conducted by Censuswide, among a sample of 1,000 ‘DIY’ Investors in the UK, aged 18+ between 30.04.25 - 08.05.25.