Inheritance tax (IHT) receipts reached £5.7billion between April and November 2024, according to the latest HM Revenue and Customs (HMRC) figures. The total represents a £600million increase compared to the same period last year. However, Britons are expected to pay even more tax under Labour’s raid on pensions and farmers.
Analysts are blaming the impact on frozen tax thresholds for this “stealth tax raid”. As it stands, the IHT tax-free allowance will remain at the same rate until 2030. However, this freeze comes as wages and property prices rise, pulling more people into paying inheritance tax. This is referred to as fiscal drag.
IHT is a levy on the estates, including the money, possessions and property, of individuals who have passed away. Inheritance tax is charged at a rate of 40 per cent on estates valued above the £325,000 threshold, however some relief is available.
This rise comes ahead of significant changes to IHT rules announced by Chancellor Rachel Reeves last month. Under the new changes, defined contribution pension pots will be included in inheritance tax calculations from April 2027.
The reform will result in an additional 1.5 per cent of UK deaths becoming liable for IHT. This measure is expected to affect 10,500 estates with inheritable pension wealth in the 2027-28 tax year.
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Pensioner will pay more in the Chancellor’s looming tax raid
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The inclusion of pension assets in estate valuations is set to contribute to a continued increase in inheritance tax receipts.
A further 38,500 estates will face additional IHT charges due to the new rules.
These estates will see an average increase of £34,000 in inheritance tax payments when pension assets are included in estate valuations.
Significant reforms to business property relief and agricultural property relief will also come into effect from April 2026.
Under this overhaul to the inheritance tax regime, Reeves is limiting the 100 per cent relief to the first £1million of combined agricultural and business property. The rate will drop to 50 per cent for any amount above this threshold.
These changes have led to widespread backlash from farmers who have marched on Westminster and called on the Chancellor to reverse her decision-making as soon as possible.
Jonathan Halberda, a specialist financial adviser at Wesleyan Financial Services, outlined how fiscal drag is impacting peoples’ tax liability and why people should expect to pay even more in the years to come.
He explained: “Another month, another increase in the Government’s inheritance tax receipts.
“This was entirely predictable given that the £325,000 threshold has been frozen until 2030, which will inevitably drag more estates into the IHT net.
“The New Year will also bring some extra clarity on the exemption that means pension funds can be passed on to beneficiaries after death without paying inheritance tax.
“In the last Budget, the Chancellor announced that this would be closed from April 2027, which she estimated would impact an extra 10,500 estates. Its not exactly clear how this would be implemented, and a consultation is currently taking place, which closes in January.
“More transparency will support more effective estate planning, but in the meantime it is sensible to seek out expert financial advice to help formulate a tailored plan thats right for you and your family and which takes into account the measures announced in the Budget.”
