Inheritance Tax (IHT) is a growing concern for many people in the UK, with increasing numbers of estates facing a rising tax liability.
Each year, the amount of IHT paid to HMRC is increasing. By 2030/31, the Office for Budget Responsibility (February 2026) forecasts that IHT receipts will reach £14.5 billion, up from £8.3 billion in 2024/25.
Frozen tax-efficient allowances are a key driver behind this trend. As your estate grows, a larger portion could exceed the threshold and become subject to IHT.
What’s more, once your estate reaches £2 million, your tax-efficient allowance can start to reduce, exposing more of your wealth to IHT.
Read on to learn how the value of your estate could affect the amount you can leave behind tax-efficiently.
The nil-rate bands allow you to pass on some assets tax-free
Your IHT allowances are known as “nil-rate bands”.
As of 2026/27, the nil-rate band is £325,000. This is the amount you can leave behind when you die without the value being included in IHT calculations. The portion of your estate exceeding the nil-rate band is usually taxed at 40%.
You may also have a residence nil-rate band if you leave a primary residence to a direct descendant. This can be up to £175,000, as of 2026/27, bringing your potential tax-efficient allowance to £500,000.
If you’re married or in a civil partnership, the spousal exemption usually allows partners to leave assets to one another tax-free. Any unused nil-rate band typically transfers to the surviving spouse, potentially allowing couples to pass on up to £1 million tax-efficiently.
The nil-rate bands are expected to remain frozen until at least 2031, meaning a larger portion of your estate could be taxable than if the thresholds had risen with inflation.
You could start to lose your residence nil-rate band when your estate exceeds £2 million
The residence nil-rate band usually begins tapering once the value of your total estate reaches £2 million.
For every £2 your estate exceeds the threshold, you lose £1 of your residence nil-rate band. So, if your estate were £100,000 over the threshold, your allowance would reduce by £50,000.
The taper continues until your estate reaches £2.35 million, at which point you lose your full residence nil-rate band. This can mean an additional £175,000 of your estate could be subject to 40% tax, potentially increasing your IHT bill by £70,000. For a couple losing the full allowance, the IHT bill could rise by £140,000.
While married and civilly partnered couples can typically transfer unused nil-rate bands to potentially double their tax-efficient allowance, the taper threshold remains fixed at £2 million. In some cases, if assets are transferred to a surviving spouse, their total estate could exceed the threshold, and they could lose both partners’ residence nil-rate bands.
More estates are passing the threshold
MoneyWeek (February 2026) reports that the number of estates valued at over £2 million could rise from 3,620 in 2023 to 16,000 by 2030/31.
The level at which the residence nil-rate band begins to taper is set to remain frozen at £2 million until at least 2031, having not changed since it was introduced in 2017.
According to the Bank of England’s (April 2026) inflation calculator, the threshold would have risen to over £2.7 million if it had grown with inflation since 2017.
As earnings rise and asset values increase with inflation, more estates could pass the £2 million threshold and start losing their tax-efficient allowance.
In particular, rising property prices are pushing up the total net value of many estates. With the threshold frozen, it’s important to consider how the value of your assets might grow over the long term when planning to pass them on tax-efficiently.
What’s more, from April 2027, your unused pension pots could be included in your estate for IHT purposes when you pass away. Depending on how much is left in your pension when you die, this could add a significant amount to your estate’s net value, potentially pushing your total over the £2 million threshold.
3 ways to potentially mitigate an Inheritance Tax bill
If you’re worried about your estate exceeding the taper threshold and losing your nil-rate band, you might consider taking proactive steps to mitigate your estate’s IHT liability.
1. Give gifts in your lifetime
Gifting wealth in your lifetime could be an effective way to reduce the value of your estate. Gifts that do not qualify for an exemption may be included in your estate for up to seven years after they were given. If you die within seven years, the value could be subject to IHT.
However, when it comes to determining whether you have exceeded the £2 million taper threshold, only assets you owned at the time of death are usually included in calculations. Therefore, gifts made within the seven years prior to death typically do not count towards the threshold.
So, by gifting your wealth, you may reduce the likelihood of losing your residence nil-rate band, while reducing the size of your estate being taxed.
That said, it’s important to ensure gifts are affordable and will not impact your current financial wellbeing or long-term financial goals. A financial planner can support you in incorporating tax-efficient gifting into your wider financial plan.
2. Leave a charitable legacy
If you leave 10% or more of your net estate to charity when you die, your IHT rate could reduce from 40% to 36%. In addition, gifts left to charities when you pass away are not included in IHT calculations. Depending on your circumstances, it could be an effective strategy to reduce your IHT bill while supporting a cause close to your heart.
Additionally, giving to charity during your lifetime can help reduce the size of your estate to mitigate an IHT bill and prevent your residence nil-rate band from being reduced.
3. Place assets in trust
You may be able to mitigate an IHT bill by putting assets in a trust.
Assets held in a trust may still be liable for IHT, depending on the type of trust used and when you pass away. However, typically, the value will not be considered when calculating whether your estate exceeds the £2 million threshold for losing your residence nil-rate band.
The rules for placing assets in trust and the IHT implications can be complex and vary between different trust types. Usually, you will be unable to remove assets from a trust once you have transferred them in. So, it’s important to seek legal and financial advice before making any irreversible decisions.
Get in touch for estate planning support
If you’re worried about your estate’s IHT liability, get in touch to find out how we can support you to pass on wealth tax-efficiently.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, Inheritance Tax planning, or trusts.
