The UK government achieved a historic high in inheritance tax (IHT) revenue during the last tax year, prior to impending changes affecting pension and farmland inheritances.

HM Revenue & Customs (HMRC) announced that IHT receipts totaled £8.2 billion for the 2024-25 tax year, an increase from £7.5 billion the previous year and significantly higher than the £3.8 billion collected in 2014-15.

The IHT tax-free allowance for estates has remained at £325,000 since 2009, and an additional residence allowance of £175,000 for those passing their main home to children or grandchildren has not changed since its implementation in 2017.

According to estate agency Savills, property constitutes approximately 38% of the average taxable estate, while stocks and shares make up 29%, and cash accounts for 18%. HMRC notes that around 4% of deaths in the UK incur inheritance tax.

These allowances are set to remain frozen until at least 2030, with the government’s Office for Budget Responsibility projecting IHT receipts to reach around £13.9 billion by the end of the decade.

Financial advisor Jonathan Halberda of Wesleyan Financial Services commented, “With more families falling under the inheritance tax threshold, the current rise in IHT revenues is expected. Monthly, we observe the repercussions of frozen thresholds that no longer align with the value of current assets, alongside an increasingly convoluted taxation system.

“Many individuals who previously would have been exempt from tax are now unexpectedly liable, while others find out about potential tax impacts only when it is too late.”

The Treasury’s forthcoming reforms to agricultural property relief scheduled for enactment in April and the inclusion of pension pots as part of taxable estates from 2027 are expected to further increase IHT revenue. Starting April 6 next year, IHT relief on farmland and business property will be capped at £1 million, with any value exceeding this subject to a 20% tax.

The government asserts that these changes will enhance fairness, support public service funding, and prevent wealthy individuals from purchasing farmland to evade IHT obligations. However, farmers have voiced concerns, arguing that these reforms may jeopardize family-run businesses, as heirs could be compelled to sell farms to cover tax liabilities.

This adjustment is projected to generate an extra £520 million annually by the 2029-30 fiscal year. Including pension assets in taxable estates is estimated to yield £1.46 billion each year, according to Treasury projections.

Consultancy Lane Clark and Peacock posited that eliminating the pension exemption from IHT could provide the government with £65.4 billion by 2047, with taxes on inherited pensions potentially amounting to £6.2 billion annually.

Halberda expressed concern: “Rather than simplifying the inheritance tax landscape, incorporating pensions into the IHT framework in 2027 complicates matters further. This is a significant transformation for which we still await additional information. Clarity is essential, yet many are left unsure about their options in the absence of clear guidance.”