Increased Inheritance Tax Nets More Families Annually: Strategies to Reduce Your Tax Burden
In the UK, more families, including some middle-income households, are now caught by the inheritance tax (IHT) net due to frozen thresholds and rising property values. According to recent data, 4.62% of deaths in 2022–23 triggered an IHT charge, up from 4.39% the previous year. This rise corresponds to 31,500 estates liable for IHT, a 13% increase from the prior year [1].
The ongoing freeze on the nil-rate band, which has been stuck at £325,000 since 2009, has played a significant role in pulling middle-income families into the tax net as their asset and property values soar. This trend is expected to continue unless the nil-rate band or other thresholds are increased [1].
However, the situation in the US presents a stark contrast. Significant tax law changes enacted in 2025 have permanently increased the federal estate tax exemption to $15 million per individual ($30 million for married couples), indexed for inflation thereafter [2][3][4]. This change means fewer upper-middle-class families will be subject to federal estate taxes, shifting the estate planning focus from tax avoidance to wealth transfer strategies that maximize inherited asset basis or charitable giving [2].
In the UK, the Exchequer has already raked in £2.22 billion in inheritance tax receipts between April and June 2023, a 6% increase from the previous year. A total of £6.7 billion was handed over to the taxman in 2022-23, a 12% increase from the previous year [1]. Annual IHT receipts are forecast to soar to £14.3 billion in 2029-30 [1].
There are, however, ways to mitigate IHT liabilities in the UK. Those who leave their property to direct descendants have an extra £175,000 tax-free allowance, meaning £500,000 is exempt. Life insurance policies placed correctly into trust are treated as if they are not part of your estate, making them free of IHT [1].
Gifts made within certain timeframes can also help reduce IHT liabilities. Gifts made five to six years before death have a 16% IHT rate, while gifts made four to five years ago face a 24% IHT rate. Gifts made six to seven years ago are charged at an 8% IHT rate, and there is no IHT payable if you die within the seven-year period of making gifts that are exempt from the seven-year rule [1].
A couple can give away up to £12,000 completely free of IHT in one tax year due to the annual gift allowance, and everyone gets a £3,000 annual gift allowance, which is exempt from their estate [1]. You can also make a tax-free gift to someone getting married or entering a civil partnership. A child receives £5,000, a grandchild or great-grandchild receives £2,500, and anyone else receives £1,000 [1].
The lowest number of taxpaying estates were in the North East, Northern Ireland, and Wales, mainly due to lower house prices [1]. Almost half of the estates handing over money to the Exchequer were in London and the South East [1].
In summary, the UK is experiencing a rise in IHT liabilities due to frozen thresholds and asset inflation, potentially burdening middle-income families. In contrast, the US has permanently increased the federal estate tax exemption, reducing the number of families paying estate tax, easing the burden on middle-income families at the federal level, though state taxes and charitable donation rules have been modified affecting overall tax strategies.
- In light of the increasing property values and frozen thresholds, retirement planning in the UK, particularly for middle-income families, should consider strategies to avoid or reduce inheritance tax (IHT) liabilities.
- Seeking financial advice from professionals who specialize in personal-finance and estate planning can provide valuable insights for effective IHT planning, including the utilization of pensions, insurance, and strategic investing.
- Business owners might find it beneficial to consult with financial experts to ensure their assets are structured in a way that minimizes IHT and maximizes wealth transfer to the next generation.
- Those in the UK can benefit from strategies such as leaving property to direct descendants, correctly placing life insurance policies into trust, and making timely gifts to help reduce IHT liabilities.
- Understanding the differences between inheritance tax regimes in the UK and the US, such as the permanently increased federal estate tax exemption in the US, can be important for those with international business or family ties, providing opportunities for strategic financial planning.
