Inheritance tax (IHT) receipts hit £4.4 billion in the first six months of the 2025/26 tax year, according to data released by HM Revenue and Customs (HMRC) this morning.
This is £0.1 billion higher than same period of the previous tax year and continues an upward trend over the last two decades.
Nicholas Hyett, Investment Manager at Wealth Club said:
“The November budget is rapidly approaching, and is expected to raise billions more in tax revenues. The Chancellor shook the IHT piggy bank pretty hard last year, but that doesn’t mean she won’t come back looking for more.
The long term freeze in IHT allowances is driving an inexorable rise in inheritance taxes, but it won’t deliver a quick tax windfall. Tinkering with things like IHT relief on AIM shares or putting further restrictions on business and agricultural relief probably doesn’t move the needle in the short term either.
Instead the target for a revenue raising Chancellor is probably gifting rules. Gifts made more than 7 years prior to death are completely free of inheritance tax, while regular gifts made out of surplus income are free from IHT immediately.
Shifting the seven-year rule to a ten-year rule is one option. Gifts made up to ten years before death could be taxed as if they were part of the estate – making one-off gifts to children to help with things like buying a new house potentially problematic, especially for those who die young, piling financial pain on top of personal grief.
IHT relief on regular gifts out of surplus income is perhaps the most generous relief available at the moment, and is often used by grandparents to help with things like school or university fees. That could make it a source of extra tax. For example, if grandparents were gifting their children £20,000 a year to cover private school fees, as long as this was out of regular income it would currently be free of IHT. However, if that relief were cut then those gifts would fall under the seven year rule and result in £40,000 of additional inheritance tax.
While reforms to gifting rules would inevitably be unpopular, the real problem at the moment is the uncertainty overhanging the budget. The government has been pretty clear it plans to raise taxes, but not how it hopes to do so. That risks people taking evasive action to avoid potential changes, and time pressured decisions taken to avoid rumoured tax changes are rarely optimal. The lack of clarity creates a real risk of financial pain further down the road.”
What can investors do to mitigate their inheritance tax bill?
As things stand there are still ways to reduce the inheritance tax paid by your estate, although many of them do require time and more risk:
Those concerned about inheritance tax could consider:
Giving money away early – still an option as things stand. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.
Investing in unlisted companies that qualify for Business Property Relief. These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control. From 2026 you will have an overall £1 million Business Relief Allowance. Anything in addition will be taxed at half the normal rate or 20%.
Investing in an AIM ISA. ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash. AIM ISAs are a popular, although riskier way, to reduce this. Currently AIM shares could be IHT free after two years. From 2026 the IHT will be halved to a rate of 20%.
