Inheritance tax haul hits another record

A 40 per cent levy. That's what HMRC is now taking from a growing number of ordinary estates, families who never imagined themselves wealthy enough to worry about inheritance tax. The culprit isn't a sudden explosion of millionaire deaths—it's something far more insidious: a threshold that hasn't budged since 2009.

Between April 2025 and January 2026, the Treasury collected £7.1bn from the tax, according to official figures released this week. That's £100m more than the same period last year, and the fifth consecutive year of record receipts.

For sixteen years, the point at which estates start paying inheritance tax has remained frozen at £325,000. An additional £175,000 allowance exists when passing on a main home to direct descendants, bringing the effective threshold to £500,000 for many families. But inflation hasn't stood still.

To maintain the same level of protection in real terms, that £325,000 threshold would need to sit at roughly £500,000 today. The gap between promise and reality has quietly transformed who this tax captures.

Fiscal drag by another name

What's happening is textbook fiscal drag. Asset values rise with inflation and market growth. Thresholds stay put. More estates cross the line. The Treasury benefits without Parliament ever voting for a tax rise.

Homeowners in the South East have been particularly exposed. Someone who bought a modest terraced house in outer London decades ago might find their property alone now pushes them above the threshold, before counting any savings or investments.

House prices have climbed steadily, though nowhere near the pace of equity markets. Since the start of 2024, the FTSE 100 has risen by 38 per cent, whilst the S&P 500 has jumped 43 per cent on the back of technology speculation.

These equity gains take time to flow through to inheritance tax receipts. They only matter when estates are realised at death, making this a lagging factor rather than an immediate driver. But the direction of travel is unmistakable: more families are hitting the threshold, and they're hitting it harder.

Mike Winstanley, director of wealth management at Bentley Reid, points out that estates valued between £3m and £5m can face tax bills exceeding £1m without structured planning. Whilst such estates remain far from typical (median UK house prices sit around £270,000), they illustrate how quickly the 40 per cent rate compounds once you're past the allowances.

The April reckoning

What makes this year particularly significant isn't just the record receipts. It's what's coming next.

Rachel Reeves used her first Budget as Chancellor to announce sweeping changes to inheritance tax reliefs, most of which take effect in April 2025. Agricultural property relief, which has protected family farms for decades, will be restricted. Business property relief for family-owned companies faces similar constraints. Shares listed on London's junior market, AIM, will lose their longstanding exemption.

The most consequential change arrives in April 2027: pensions will be brought into the inheritance tax net for the first time. Until then, pension pots have passed to beneficiaries free of the levy, making them one of the most tax-efficient assets for intergenerational wealth transfer. That window is closing.

Together, these measures are projected to raise an additional £2bn annually, according to Treasury estimates. That's not a rounding error. It represents a fundamental broadening of the tax base, pulling in estates that would have previously escaped through reliefs designed to protect working farms and family businesses.

Amit Joshi, managing director of wealth at Mattioli Woods, describes inheritance tax as having become "a planning issue by stealth". His firm reports that many families only discover the potential liability when it's too late to act. The observation cuts to something important: this isn't a tax that announces itself. There's no annual bill, no payment reminder. It materialises at death, often catching families unprepared.

Political toxicity meets fiscal reality

The politics here are fraught. Inheritance tax touches only 4 to 5 per cent of estates, yet consistently ranks as one of Britain's most despised levies. Critics call it double taxation on assets already subject to income tax, capital gains tax, or both. Defenders argue it's a progressive brake on entrenched wealth inequality.

What's interesting is how the frozen threshold has shifted this debate. When inheritance tax primarily affected the genuinely wealthy, public sympathy was limited. But as homeownership and pension savings have dragged middle-class families into scope, the political calculus has changed. The government has already extended the threshold freeze to 2030, locking in fiscal drag for another half-decade.

For families now sitting just above the threshold, the strategic response isn't straightforward. Gift assets seven years before death and they escape the net, but predicting mortality is impossible. Trusts offer planning flexibility but come with their own tax complications and costs. Life insurance can cover the bill without depleting the estate, though premiums eat into current income.

The April changes will force a new cohort of families to confront these trade-offs. Farmers and business owners who assumed their assets would pass tax-free will need to revisit succession plans. Anyone with substantial pension pots and other assets will face calculations they've never had to make before.

The stealth element is wearing off. Whether Parliament addresses the underlying threshold freeze, or simply collects the growing revenue, will define inheritance tax policy for the next decade. Meanwhile, HMRC has intensified its enforcement activity, recovering £246 million through compliance investigations last year alone.