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

This year, Tax Freedom Day UK – the point at which Britons stop paying taxes and begin keeping what they earn – falls on 30th May. That is 11 days earlier than last year, although it remains later than before the Covid-19 pandemic. 

Tax Freedom Day represents the theoretical point in the year when the average person has earned enough to cover their total tax bill and can start earning for themselves. This includes a wide range of taxes, such as income tax, National Insurance contributions, property taxes, VAT and corporation tax. 

Meanwhile, separate figures highlight the continued rise in inheritance tax (IHT) receipts. HMRC reported collected £8.5bn in the 2025/26 tax year, reaching record highs and could hit £14bn-£15bn by 2030/31 - according to estimates by the Office of National Statistics (ONS). 

Receipts have been climbing steadily because of rising asset prices and frozen tax thresholds, which draws more people into the IHT net every year. Looking ahead, changes to pension rules are expected to push receipts higher from April 2027 onwards.  

IHT is often touted as “Britain’s most hated tax” as many people see it as a tax on money that has already been taxed - through income tax, capital gains, or stamp duty during a lifetime (or the number of days you work each year before your evening are yours to keep). Even though the system has reliefs and exemptions, the perception is that the government is taxing the same wealth twice. It explains why “brits dodging inheritance tax” is a trending topic right now. 

Inheritance tax is often misunderstood

In some cases, 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. Our Money Milestones’ research* revealed that over 80% of consumers said they understood how IHT works. Yet closer inspection shows there are areas that are poorly understood with only a quarter (26%) say they understand IHT entirely. This can lead to people make the wrong assumptions about their estate’s tax liability. 

More than half (52%) say they know how much IHT will be payable in the event of their death. That said, the same research revealed that those with smaller estates, it tends to be over-estimated. Roughly half of people with an estate valued between £100,000 and £325,000 (i.e. below the nil rate band) believe there will be IHT to pay, which isn’t the case. 

Read more: how does inheritance work? 

The research also shows 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 in the futre. Equally, if there were to be significant rises in property prices or wages, more estates could be liable for IHT. 

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 get rid of an IHT problem, but it’s 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%, 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.