Average inheritance tax bill hits £231,000 as pension changes loom: what can you do?

New government data found that the average tax bill for an inheritance tax paying estate has increased to £231,000, up 9% year-on-year. This comes ahead of the changes which will see pensions included within inheritance tax (IHT) from April 2027 onwards.

Although only around 5% of estates pay the tax, the amount being collected continues to hit new records as property values and investment wealth have risen while key tax thresholds have remained frozen.

Many people still view IHT as a tax on the very wealthy, but years of house price growth have brought more ordinary families into scope. Everyone can pass on up to £325,000 before any IHT is due, although this IHT nil rate band has been frozen since 2009. The residence nil rate band (RNRB) has been available since 2017 and gives a boost of up to £175,000 per person if a property is left to their direct descendant(s).

A combination of these bands means most couples can pass on up to £1 million on second death.

But had both bands been uprated with inflation rather than being frozen in 2020, a couple could currently pass on an estate worth more than £1.49 million combined, a figure which could rise to in excess of £1.62 million by the time the freeze is due to end in April 2031. In fact, the main nil rate band alone would be worth around £520,000 today had it been indexed to inflation.

Extended freeze means more estates are affected

Government policy is set to turbocharge the IHT tax take, with former chancellor Rachel Reeves extending the freeze on thresholds, which is now set to last more than 20 years. The decades-long freeze to the nil rate bands has dragged more households into the taxman’s death duty, with the addition of the complicated RNRB only providing some respite. To make matters worse, unspent pension savings will also be snared by IHT from 2027.

Prime minister Andy Burnham wants to grasp the nettle on social care reform, but questions are being asked about how this will be funded. One proposal that is rumoured to be on the table is to transform the landscape completely and replace IHT with a flat 10% estate levy.

Currently, fewer than one in twenty estates pay IHT, but they can face a headline rate of 40% above the available allowances. A flat-rate estate levy would potentially reduce the burden for some estates, particularly those impacted by the tapering of the residence nil rate band, while extending a charge to many families who currently pay no IHT at all, dramatically widening the number of estates affected.

The debate is shifting from whether the UK should continue with a relatively high tax on a small minority of estates or move to a much lower rate applied far more broadly. For families currently relying on generous nil-rate bands and exemptions, the eventual outcome could be very different from the system reflected in these latest HMRC figures.

What you can do

If you’re at all concerned about IHT and want to make sure you manage your affairs tax efficiently it is well worth speaking to a financial planner for some expert help.

There are several things that you can do yourself though to help get ahead of any potential IHT spikes in your finances.

1. Gifting funds

Gifting money is arguably the simplest way to avoid a high inheritance tax bill, but it does come along with serious implications, and you still need to be aware of how you could be taxed – as well as the impact it can have on your own finances. It’s important to remember that once you gift assets, they are no longer legally yours, and the recipient can do what they please with the gift.

You can gift £3,000 per year exempt from tax. These exemptions are for an individual, so a couple could gift double this amount exempt from tax. While there's no maximum for the amount you can gift, it could be subject to inheritance tax if the gifter dies sooner than seven years after the assets were passed over. But this does work on a sliding scale beginning at three years, where IHT drops from 40% to 32%.

2. Prioritising pension use

Spending your pension may seem like a pretty obvious solution to not facing inheritance tax on your pot. But in the past, pensions have been an asset that people tend to hang on to in retirement if they can. Instead, they would live off savings accounts like ISAs. These are helpful because they don’t face any income tax when people withdraw from them.

With pensions facing inheritance tax as well as income tax, this situation has now changed. ISAs are considered part of your estate, so they will be subject to inheritance tax but not income tax. Meanwhile, pensions will face both inheritance tax and income tax when they are passed down, depending on the recipient's other income.

This means that ISAs will preserve more of their value when they are passed down than pensions will. Instead, you could keep your ISA savings in place and start drawing from your pension in retirement. You could take 25% of your pension pot tax free and can get some added relief from your annual income allowance.

Discover key facts about inheritance tax.

3. Consider downsizing your home

If a large amount of your wealth is typically tied up in your home and downsizing may save your inheritors some cost in the future.

It may seem like a drastic step to take to avoid a future tax, but it can make a big difference in what you are able to pass on. And while you may feel settled in your home, downsizing could also open opportunities for yourself, such as travel or pursuing hobbies that would otherwise be out of budget.

It can provide other benefits too: a smaller home could mean less money on bills and might free up some of the time you’ve previously spent maintaining the property.

Homes do allow for some leeway outside the usual £325,000 allowance for someone’s estate. If you own your home and are passing it down to your children or grandchildren, your allowance will increase from £325,000 to £500,000. If you are married or in a civil partnership, each partner gets this allowance so it will expand to £1 million.

However, if your home is valued at more than £2 million, you do not get the extra exemption. If you pass the home on to your spouse or civil partner, there will not be tax regardless.

If you plan to pass your home on to your children, you might consider using the money released from selling your home and moving to a cheaper property to help them with a lump sum gift instead. By gifting to them now, instead of after you have passed, you could avoid paying any tax on the assets. This is because, as discussed above, gifts are not liable for inheritance tax if they were given seven years or more before the death of the gifter.

4. Investing through a trust

Another option that some may consider is placing assets in a trust. By using a trust, instead of gifting the money directly, there can be a bit more control over what happens to the funds. When assets are placed in a trust, they are ring fenced from your estate and placed in the control of the trustee. Later, the trustee will be the one to distribute the assets.

However, it’s important to be aware of the taxes around trusts, and the rules can be complex. Depending on how much you place in the trust, you could face IHT up front (though at a lower rate), and if the trust stays in place without being distributed for over a decade, you can face additional charges. If you plan to pass down a business or farm, there are some exceptions here that may be beneficial.

You might think of bringing the previous point in here and placing your home into a trust, but this can come with its own complications.

For example, if you continue to live at this home, it will still fall under your estate and be subject to inheritance tax.

Because of the complicated rules around trusts, getting professional advice will be an important step for most. But the rules around holding businesses or agricultural property in a trust change in April 2026, so if this is something you’re considering, it is better to start sooner rather than later.