Families across Britain are increasingly using little-known loopholes to reduce their inheritance tax bills as government receipts hit a record-breaking £7.6billion.
That figure already surpasses last year’s all-time high of £7.5bn, and represents an 11 per cent increase compared to the same 11-month period last year, when receipts stood at £6.8bn.
It marks the fourth year in a row that inheritance tax (IHT) has hit new highs – driven largely by frozen tax thresholds and rising property prices, particularly in the South East.
The £325,000 nil-rate band and £175,000 residence nil-rate band have both been frozen until 2030, dragging more families into the IHT net each year through what many are calling “fiscal drag”.
Once a tax on the wealthiest estates, inheritance tax is now increasingly impacting middle-income families, prompting a rise in the use of underused exemptions, seven-year gifting rules, and family trust arrangements to limit exposure.
Many homeowners are finding themselves unexpectedly liable for a 40 per cent tax charge on inherited wealth.
Without intervention, the number of families caught in the inheritance tax trap will continue to rise.
That figure already surpasses last year’s all-time high of £7.5bn
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Stephen Lowe, Director at retirement specialist Just Group, said: “Another year, another record-busting Inheritance Tax haul for the Treasury” – marking the fourth consecutive year of all-time highs.
He warned that frozen thresholds and rising property prices have driven the surge so far, but changes from the Autumn Budget, including restrictions on Agricultural and Business Relief from April 2026, could “bring in even greater amounts” in the years ahead.
Further pressure is expected with the removal of pension death benefits from IHT in 2027, potentially hitting families hard.
In response, more households are turning to lesser-known gifting strategies to ease the burden.
Dyall continued: “We have seen many clients quite sensibly 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 regular gifts out of surplus income.”
Gifts out of surplus income can be particularly effective for inheritance tax planning.
TGifts out of surplus income can be particularly effective for inheritance tax planning
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Stevie Heafford, Tax Partner at HW Fisher, explains the three rules to follow to make sure that one’s gift out of surplus income will be exempt from Inheritance Tax.
- The gifts must be made out of your income
- They must be paid on a regular basis and become part of your ‘normal expenditure’
- Making these gifts should not impact your current standard of living
Surplus income is any income remaining after all outgoings have been paid. This includes not just employment earnings and pension payments, but also interest, ISAs, dividends and rental income.
Experts recommend keeping detailed records of all payments and writing a letter of intent to recipients. This documentation provides evidence for HMRC should they question inheritance tax liabilities.
The annual exemption of £3,000 can be rolled forward up to one tax year. For marriages or civil partnerships, gifts of up to £5,000 can be made depending on your relationship to the recipient.
As inheritance tax bills continue to rise, more families are seeking alternative solutions
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Small gifts of up to £250 can also be made to anyone free of Inheritance Tax. Gifts out of surplus income can be particularly effective for inheritance tax planning.
As inheritance tax bills continue to rise, more families are seeking alternative solutions.
Dyall said: “The option of insuring against the liability is also growing in popularity. 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.
“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.”
Estate planning experts emphasise the importance of getting professional advice to manage estates efficiently.
