Families seeking to reduce inheritance tax (IHT) liabilities are being urged to exercise caution, as missteps could still result in substantial tax charges. The nil-rate band for IHT has been fixed at £325,000 since 2009 and is set to remain unchanged until April 2031. Similarly, the residence nil-rate band remains frozen at £175,000. As property and asset values have increased, a growing number of estates have become liable for IHT, with receipts reaching a record £8.5 billion in the 2025/26 tax year. The Office for Budget Responsibility projects this figure could rise to £15 billion annually by 2030/31.

In addition, changes introduced by former Chancellor Rachel Reeves will make most unused pension funds and pension death benefits subject to IHT starting in April 2027. This has led many families to consider transferring assets or money during their lifetime. However, gifts made less than seven years before death may still be counted as part of an estate and subject to tax, complicating such strategies.

Data from NFU Mutual reveals that between 2021 and 2024, 5,080 estates collectively paid over £1 billion in IHT on lifetime gifts. For the tax year 2023/24 alone, 1,390 estates paid £315 million in inheritance tax on gifts made within seven years of death, with an average liability of approximately £226,000.

Sean McCann, a chartered financial planner at NFU Mutual, highlighted a common misconception regarding taper relief on gifts. He explained that while taper relief reduces the tax due on gifts made between three and seven years before death, it applies only to the amount exceeding the £325,000 nil-rate band. For example, if an individual gave away £100,000 and died six years later, the entire sum would fall within their nil-rate allowance, and no tax would be due on the gift itself. Conversely, gifting £425,000 six years before death would exhaust the nil-rate band, leaving £100,000 potentially liable for IHT, albeit at a reduced rate due to taper relief.

McCann also warned that upcoming budget measures, expected in October, could tighten the rules surrounding gift exemptions, including those for regular gifts from surplus income.

Further complicating the landscape, HM Revenue & Customs (HMRC) suspects significant underpayment of IHT by wealthier individuals, estimating a shortfall of approximately £392 million for the year ending March 2026. Duncan Mitchell-Innes, deputy head of private client services at TWM Solicitors, noted that HMRC’s enhanced data analytics capabilities have improved its ability to detect underpayments. These analytics include cross-referencing insurance valuations of valuable items like jewellery and artwork, monitoring transfers to overseas accounts, comparing probate values with tax returns, and assessing property valuations against local market data.

Given these developments, experts advise families to maintain comprehensive records of any gifts, including dates and values, and to seek professional advice before executing significant transfers. Proper planning is essential to avoid unexpected tax liabilities in the future.