Inheritance tax raises £5billion in 7 months | Personal Finance | Finance

Inheritance tax has raised a staggering £5billion in seven months, according to new HMRC figures.

The soaring receipts were recorded by HM Revenue and Customs (HMRC) between April to October 2024, and mark a £0.5billion increase than the same period in the previous year.

During the last full tax year, inheritance tax (IHT) raised £7.499billion, and currently just one in 20 estates is liable.

However, the Chancellor listed a raft of reforms in the Autumn Budget which could mean even more estates are dragged into the threshold.

Under current inheritance tax rules, estates valued above £325,000 are typically taxed at 40%. This is referred to as the “nil-rate” threshold, and it has been frozen since 2009 despite soaring house prices and inflation.

During the Budget, Rachel Reeves announced an extension to the freeze on IHT thresholds for a further two years until 2030.

Agricultural Relief and Business Property Relief have also been reformed, effective from April 2026. The first £1million of qualifying combined assets will be exempt from inheritance tax. For assets exceeding £1million, a 50% relief will apply, resulting in an effective tax rate of 20%.

Previously, assets that qualified for this relief were fully exempt from inheritance tax.

Thirdly, qualifying AIM shares will no longer be fully exempt from inheritance tax. Starting in 2026, they will be subject to a 20% inheritance tax rate if held for at least two years.

Finally, from April 6, 2027, inherited pensions may become subject to both inheritance tax and income tax for the recipient. This could result in an effective tax rate of up to 67%, pending consultation.

Alex Davies, CEO and founder of Wealth Club, said: “Inheritance tax was already an absolute cash cow for the Government. The extreme changes announced in last month’s Budget which badly affect farmers, business owners, pension policyholders and investors, mean these figures are only going to increase over the coming years.

“The tax burden is already at its highest in 70 years and growth is very low. More tax is likely to stifle growth further.

“These changes have given those affected no time to plan. It’s very much a case of ‘one day, that’s your money, the next day, it’s not’; a sentiment which is hardly going to encourage people to invest for the future whether that’s in their own business or in a savings vehicle such as a pension.”

However, the wealth expert noted: “That said, you can only base your decisions on the facts as they are now and seemingly there are still ways available to reduce the inheritance tax paid by your estate, although many of them do require time and more risk.”

How to protect your wealth

Firstly, Mr Davies suggested people give money away early. He explained: “Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts.

“Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.”

Secondly, people can consider investing in unlisted companies that qualify for Business Property Relief.

Mr Davies said: “These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.

“From 2026 you will have an overall £1million Business Relief Allowance. Anything in addition will be taxed at 20%.”

Finally, Mr Davies suggested investing in an AIM ISA. He explained: “ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash.”

An AIM ISA is a portfolio of shares in companies listed on the Alternative Investment Market (AIM) that are designed to benefit from tax advantages. Profits are typically free from income tax, capital gains and dividends tax, and inheritance tax in some cases.

Mr Davies said: “AIM ISAs are a popular, although much riskier way, to reduce this. Currently after two years they could be IHT free. From 2026 the IHT will be halved to a rate of 20%.”