New ‘death tax’ warning as experts say avoid HMRC threshold risk | Personal Finance | Finance

More families are being quietly sucked into paying the HMRC inheritance tax – with experts warning that many only realise when it is already too late.

Financial advisers say a combination of frozen thresholds and soaring property values means what was once a levy on the wealthy is now hitting ordinary households – with bills for the so-called death tax of up to 40% on parts of an estate. The standard inheritance tax threshold – known as the nil-rate band – has been stuck at £325,000 since 2009, while the additional residence allowance has also been frozen.

Over the same period, house prices and investments have surged, pulling more estates over the limit. The result is a sharp rise in so-called “fiscal drag”, where people are caught by tax increases without any change in rates.

Scott Gallacher, Director and Chartered Financial Planner at Rowley Turton, said families are being dragged into the net “by stealth”.

He said: “Frozen thresholds and rising asset values are quietly dragging more and more families into scope, often without them realising.

“The reality is that IHT is becoming a middle-class issue by stealth. Many families are being caught not because they’ve actively built significant wealth, but simply because asset values have risen over time.

“For some, it comes as a genuine surprise. They don’t feel wealthy, yet their estate may face a 40% tax charge on part of their assets.”

Eugen Neagu, Director at N2 Asset Management, said: “With timely and sensible planning, such as using allowances, exemptions and lifetime gifting, many people can legally reduce or even eliminate an IHT bill altogether.”

How to legally reduce or avoid inheritance tax

Make use of gifting rules: You can give away up to £3,000 a year tax-free, plus additional small gifts. Larger gifts may fall outside your estate if you survive 7 years. Use the residence nil-rate band: Passing the family home to direct descendants can boost the tax-free threshold by up to £175,000 per person.

Combine allowances as a couple: Married couples and civil partners can pass on up to £1 million tax-free when combining both nil-rate bands and residence allowances.

Gift from surplus income: Regular gifts made from spare income – rather than capital – can be immediately exempt if structured correctly.

Put assets into trust: Trusts can help remove assets from your estate while still allowing some control, though rules are complex. Take out life insurance: Policies written in trust can cover an IHT bill, preventing heirs from having to sell assets.

Review pension planning: Pensions have traditionally sat outside estates, but with rule changes from 2027, careful structuring is increasingly important.

Plan early: Many strategies take years to become effective, meaning last-minute action can significantly limit what can be done.

Experts say the problem is particularly acute for homeowners, with property often making up the bulk of an estate. Anita Wright, Chartered Financial Planner at Ribble Wealth Management, told Newspage in 80% of unexpected cases the family home is the main factor pushing estates over the threshold.

She said: “They’re not buying yachts yet their children could face a 40% tax charge on everything above the threshold. The family home is overwhelmingly the main driver.”

Advisers warn that confusion around the rules is widespread – with some families worrying unnecessarily while others face six-figure bills without realising it.

Rob Mansfield, Independent Financial Adviser at Rootes Wealth Management, said: “More and more families are feeling the IHT squeeze. It’s a combination of it being a poorly understood tax and the frozen rates dragging more people into the net. I’ve met with people terrified of inheritance tax who are never likely to pay it and others who are blissfully unaware of the six figure bill their families face on their death.”

Experts stress that inheritance tax is often avoidable with forward planning – prompting some to describe it as a “voluntary tax”.

Advisers warn that leaving it too late can severely limit options, as many strategies take years to take effect.

Eamonn Prendergast, Chartered Financial Adviser at Palantir Financial Planning, said the pressure will intensify further, with pensions set to be included in inheritance tax calculations from April 2027.

He said: “From April 6, 2027, unused pension funds and death benefits will also be brought into scope for IHT, which makes early planning far more important.”

Martin Rayner, Director at Compton Financial Services, added that the shift has been dramatic. He said: “People who would not have been exposed five or ten years ago are now being caught simply due to rising asset values. With straightforward steps taken in good time, this is often a tax that can be significantly reduced or avoided altogether.”