Since the average inheritance tax bill has increased, more people will be affected

Due to fiscal drag , the inheritance tax burden is increasing; once pension pots are added to the net starting in April 2027, it will increase even more

Even though it only affects a small portion of the population, inheritance tax (IHT) has long been referred to as Britain's most despised tax. However, that is beginning to change as more people are expected to be affected by the 40 percent levy in the upcoming years.

Fiscal drag refers to the fact that more families have been and will be added to the IHT net annually due to rising home prices and frozen inheritance tax thresholds.

When pensions are included in the estate for inheritance tax starting in April 2027, the problem is expected to get worse.

According to the most recent HMRC data, 4.72 percent of UK deaths resulted in an inheritance tax charge in the tax year 2023-2024, an increase of 0.10 percentage points over the previous year. The percentage of estates that pay inheritance tax is currently at its highest level since 2006-2007, when it was 5.96%.

Watch the entire video here: In the UK, 30,400 deaths resulted in an IHT charge; the average bill for estates that paid IHT was 231,000. Revenues from inheritance taxes totaled £7 billion during that time, a five percent increase over the prior year.

According to the Office for Budget Responsibility (OBR), inheritance tax brought in 8.4 billion for taxpayers in 2024-2025. The OBR projects that this amount will rise to 14.7 billion in 2030-2021 due to a number of factors, including the fiscal drag, the April 2026 cap of 2.5 million on 100% agricultural property relief and business property relief, and the inclusion of pensions in an estate.

Here are some ways to prepare ahead of time, as more people will eventually be subject to inheritance tax.

Do you have the ability to use gift allowances?

If you give your home to your children or grandchildren and your estate is worth less than £2 million, the standard inheritance tax threshold of £325,000 can be increased to £500,000. However, there are strategies to lower an inheritance tax bill, like lifetime gifting.

Giving presents can lower inheritance tax obligations because, if done correctly, they won't be part of the estate. There are several exemptions, such as the annual exemption, which permits you to give up to £3,000 in gifts annually without them increasing the value of your estate. One person can receive the entire £3,000, or it can be distributed among several individuals. This allowance may be carried over to the following tax year, but only for a single tax year, if it wasn't used in the previous one. Weddings and civil partnerships are also eligible for gift allowances.

Gifts that are substantially larger and given during your lifetime may also be exempt from inheritance tax. The seven-year rule states that, unless the gift is a part of a trust, no IHT is due on it if you live for seven years after giving it. Even if you pass away within those seven years, your loved one may not have to pay the full 40 percent inheritance tax rate because the rate taper off after three years. The issue with the seven-year rule is that you probably won't know how long you'll live or how much money you'll need for things like care in the future.

As long as the recipient hasn't already benefited from the annual exemption that year, you can also give away £250 to as many people as you like under the small gifts exemption.

Other gifting allowances also apply; as long as you don't leave yourself short and the money comes from your monthly income, you can give as much as you'd like in regular payments to another person.

Giving during your lifetime may reduce the amount of money that is subject to inheritance tax in the future if you can afford to do so. Additionally, you might be able to witness how your hard-earned money improves the lives of those you care about. However, since there are subtleties to the rules to be mindful of, it might be worthwhile to seek advice.

Don't sidestep the discussion about inheritance.

The unwritten rule is to avoid discussing politics, religion, or money at the dinner table. Talking about inheritance can be awkward, but it's important.

Talking to loved ones about your estate plans while you're still living allows you to directly express your desires and resolve any issues.

In order to prevent disappointment or disagreements after your passing, you can write a side letter outlining your will. It can help them comprehend your choices and lessen the possibility of any unpleasant financial surprises while they're grieving.

Don't forget to preserve the documents.

When it comes to inheritance tax, maintaining a paper trail is crucial.

Make sure you keep a record and store your money in a secure location if you are in a position to give it away. It's all well and good to plan ahead, but your loved ones might need to provide proof if HMRC shows up.

However, your loved ones may find it very helpful to have a record of your personal and financial information after you pass away. Royal London has created a "when I'm gone list" that includes your funeral wishes and where friends and family can locate important documents. Make sure your loved ones are aware of its existence and storage location.