After the latest figures from HM Revenue and Customs show another rise in inheritance tax receipts in January, wealth managers discuss the outlook and share their insights on the best ways of mitigating tax liability.

The inevitable monthly increase in inheritance tax receipts leaves little doubt that this will be another record tax year for IHT revenues. And wealth managers are trying to show clients how they can reduce the impact. (See a related article here.)

Estates across the UK continue to grow in value as nil-rate bands remain frozen, according to Ian Dyall, head of estate planning at UK wealth manager Evelyn Partners. 

HM Revenue and Customs (HMRC) IHT receipts were £700 million ($885 million) higher in January than in the same period a year earlier. They are continuing to rise, driven by frozen nil-rate band thresholds and increasing asset prices, continuing the upward trend seen over the last two decades. 

“This trend is going to continue, and we’ll also see more people affected by the tax,” Andrew Zanelli, head of technical engagement, abrdn said in note. “The Office for Budget Responsibility predicts that one in 10 estates will have IHT to pay by the end of the decade.”  

“Nearly all the advisors I’ve been speaking to are being approached by their clients about IHT and a big driver is the plan to make pensions subject to IHT. We’re still waiting on the finer details around how this will happen, but we know the basic facts and the intention for this to be in place by 2027,” Zanelli added. “What we’re hoping to be fixed before then is the very real risk of delays to the bereaved receiving their inheritance because of the new process.” 

Paul Barham, partner at Forvis Mazars, emphasised how it is predicted that by 2029–30, the share of deaths liable for inheritance tax will reach its highest level in over 50 years. 

Dyall highlighted that pension pots will not become liable for IHT until April 2027 and the combined business and agricultural property relief exemption will not be cut to £1 million ($1.3 million) until April 2026. “While it seems unlikely further tax changes will be announced at the spending review in late March, the next autumn Budget could well stir speculation if the Chancellor has to cast around for a few extra billion to balance the books,” Dyall said. 

“One possibility is an overhaul of the gifting regime, as this would be a relatively easy way for the Treasury to extract a bit more from IHT without raising the headline rate or cutting the nil-rate bands,” he added. "That could close off some of the options that families have been using to reduce their IHT liability, especially since the October Budget. We have seen many clients increase gifting since as far back as the election – some simply setting the seven-year clock ticking for potentially exempt transfers with large one-off gifts, others using lesser-known methods like gifts out of surplus income.” 

“Either way, as the trend is most definitely that many estates will face significantly higher IHT bills, with possibly fewer ways to mitigate them, then the option of insuring against the liability is also growing in popularity,” Dyall continued. “Since October we have already seen many more clients seeking whole of life cover aimed at covering a future IHT bill so their beneficiaries will not have to foot it, and we expect to see many more do this in the future as it is not yet a widely understood option – particularly among families who are not taking professional advice.” 

“To avoid unexpected financial burdens, it is crucial for individuals to regularly review their wills and estate planning with professional legal advice to manage their wealth efficiently,” Tim Snaith, partner at Winckworth Sherwood, said.

Jonathan Halberda, specialist financial advisor at Wesleyan Financial Services, also believes that IHT receipts will keep rising, with more and more estates finding themselves falling within its scope – especially when pensions become subject to IHT from April 2027.

Halberda outlined ways to mitigate the tax liability, including: 

Managed gift giving 
“Giving gifts of money or assets to loved ones is one of the most straightforward ways to reduce your inheritance tax liability. In general, every year you are allowed to give gifts of any value to a spouse or partner, or gifts of up to £3,000 to anyone else. You can also make regular payments out of your income, which can help stop the value of your estate exceeding the £325,000 tax-free allowance. But there are limits: gifts given less than seven years before you die can be taxed, depending on the value and your relationship to the recipient.”

Try a trust
“Another way to reduce your inheritance tax liability is to put some of your assets in a trust, which means they technically don’t belong to you anymore, so they aren’t counted as part of your estate. A trust is a legal arrangement where assets are held by a trustee or group of trustees for the benefit of someone else, but you can still control how, when and to whom the money is paid.”

Plan for your partner
“Married couples and civil partners enjoy certain inheritance tax exemptions. You can leave your entire estate – including the family home – to your spouse or civil partner with no inheritance tax to pay, even if its value exceeds the £325,000 threshold. But couples who are living together, no matter how long they have been in a relationship, don’t qualify for this exemption. As a result, some couples inheritance planning may include getting married or forming a civil partnership.

Where there’s a will
“Having an up-to-date will is one of the most effective ways to ensure your estate is distributed according to your wishes. Without a will, you have no say over who inherits what or how much inheritance tax may have to be paid. By making a will, and reviewing it regularly, you can take advantage of all the exemptions and allowances that can help you keep your Inheritance Tax bill as low as possible.”