During the 2024–25 tax year, Britons paid a record £8.2 billion in Inheritance Tax, up from £7.5 billion in the previous year 2023–24. 

Inheritance Tax (IHT) in the UK is a tax on the estate (property, money, and possessions) of someone who has passed away. 

The amount of IHT paid each year varies and has increased year-on-year for the last decade. This is due to increases in property prices and asset values and any government changes in tax-free thresholds which means more estates fall within the IHT regime.

Inheritance Tax thresholds and tax bands

In the UK, Inheritance Tax is charged at 40% on estates exceeding the nil rate band. The standard nil rate band is £325,000 per person. Additionally, there is a residence nil rate band of up to £175,000, which applies when a home is passed to direct descendants.

These thresholds have remained unchanged for over a decade. 

The thresholds mean that an individual can pass on up to £500,000 tax-free and when combined with their spouse, this can be a total figure of £1 million which can be directly passed onto relatives.

A comparison of Inheritance Tax paid in the last five years

The following table compares the amount of Inheritance Tax paid in the UK over the past five tax years:

Tax Year Inheritance Tax Collected (£ billion)

2019–20 approximately £5.5 billion (estimate)

2020–21 approximately £5.8 billion (estimate)

2021–22 approximately £6.0 billion (estimate)

2022–23 £7.50 billion

2024–25 £8.20 billion

If you need immediate funds to pay for your pressing Inheritance Tax bill, Provira offers an Estate Advance loan, offering up to 50% of your inheritance whilst the estate is still in Probate. 

What percentage of Britons do not pay any Inheritance Tax?

Despite the significant amount collected, the vast majority of Britons do not pay inheritance tax. 

Over the last 5 years, around 95% of estates in the UK were not liable for inheritance tax because the value of their estate does not exceed the threshold – meaning only 5% of estates would pay Inheritance Tax.

In 2022 to 2023, this equated to around 31,500 estates that paid any kind of IHT (Source: Gov.uk)

However, recent figures show that this figure is increasing, with 6% of estates expected to pay Inheritance tax in 2024/25 and 10% of Estates may owe as much as £500,000 in tax due. (Source: Moneyweek)

Why are Britons paying more in Inheritance Tax each year?

Britons are paying more in Inheritance Tax each year mainly because house prices and asset values have risen faster than the tax-free allowances. 

The nil rate band of £325,000 and the residence nil rate band of £175,000 have been frozen for more than a decade. As a result, more estates are crossing the threshold, even when the families are not especially wealthy.

This is sometimes called fiscal drag, where frozen allowances and rising values pull more people into paying tax.

Furthermore, the government has not adjusted the Inheritance Tax system to reflect inflation.

While the cost of living and property values have increased sharply, the limits for tax-free inheritance have stayed the same. 

A house that may have been worth £250,000 fifteen years ago could now be worth double that, which pushes many ordinary families into the Inheritance Tax bracket.

The increase is also linked to more people leaving their estates to children and grandchildren rather than to a spouse. Anything left to a spouse is free of Inheritance Tax, but when wealth passes to the next generation, it is more likely to trigger a tax bill.

With more people owning property and pensions of significant value, HMRC has seen tax receipts climb year-after -year.

How long is the nil-rate band and residence nil-rate band frozen for?

The nil-rate band of £325,000 and the residence nil-rate band of £175,000 remain frozen until at least 2030. Whilst the number of estates liable to pay tax is increasing year-on-year in the UK, this is managed by the nil-rate band and residence nil-rate band not changing until 2030.

At this point, the government may decide to raise the bands, lower the bands or keep the bands the same.

What can be done to reduce my Inheritance Tax bill when passing inheritance to my children?

Giving gifts to family members – One of the most effective ways to reduce your Inheritance Tax liability in the UK is by making gifts during your lifetime. If you give away money or assets and live for at least seven years after making the gift, it will usually fall outside of your estate. This is called the seven-year rule. If you pass away before the seven years are up, the gift may still be taxed, but the amount of tax is reduced if you survive at least three years.

Use your annual gift allowance – Each tax year you are allowed to give away up to £3,000.. If you did not use this allowance the year before, you can carry it over, which means you could give away up to £6,000 tax-free in one year.

Special exemptions for wedding gifts –  A parent can give a child up to £5,000 for their wedding without Inheritance Tax being due. Grandparents can give up to £2,500 and other relatives or friends can give up to £1,000. These allowances apply separately from the annual gift allowance.

Give to charity or political parties – Anything you leave to a registered charity or to a qualifying political party is completely free of Inheritance Tax. In addition, if you leave at least 10% of your estate to charity, the rate of inheritance tax on the rest of your estate is reduced from 40% to 36%. This can be a useful way to lower the tax bill while supporting a good cause.