Rob Keyse and Zoe Chessun, in our Wills, Probate, Tax & Trusts team, look at the latest data shared by The Office for Budget Responsibility (OBR) and offer a reminder of the importance of lifetime tax planning.
What is Inheritance Tax?
Inheritance Tax (IHT) is applied to the value of your estate when you die, but several allowances can reduce the amount that’s taxable.
The Nil Rate Band (NRB) allows the first £325,000 of your estate to be passed on tax‑free, with anything above being taxed at a standard rate of 40%. If you leave your home (or a share of it) to direct descendants, such as children or grandchildren, you may also benefit from the Residence Nil Rate Band (RNRB), which provides an additional £175,000 allowance.
Estates passed to a spouse or civil partner are fully exempt from Inheritance Tax and any used allowances between spouses can be transferred. The rules around these reliefs are complex but, in many cases, a married couple can therefore leave up to a million pounds in their Will tax free.
What is the Office for Budget Responsibility's forecast and why are Inheritance Tax set to rise?
The OBR forecasts that Inheritance Tax revenues will rise to £8.7 billion in 2025-26, driven by more estates becoming liable for the tax. Stronger share prices are expected to contribute significantly to this growth, with the higher value of equity holdings in estates projected to boost receipts by approximately £300 million a year on average over the five‑year forecast period.
The rise in Inheritance Tax receipts is occurring against a backdrop of steadily increasing property values and asset prices, while the £325,000 Nil Rate Band has been frozen since 2009 and will remain unchanged until 2030-31. As asset values grow but the threshold does not, more estates are pushed into the taxable range. A person’s estate can consist of any home, savings, investments, and possessions. It can also include the value of certain items you may have passed in your lifetime, including any gifts made in the seven years before your death.
The Residence Nil Rate Band of £175,000 was introduced from 6 April 2017 and has also been fixed until 2030. Meanwhile, residential properties make up the largest share of most estates and average house prices have risen by more than 70% between 2009 and 2023. The lender Nationwide predicts that annual house prices will continue to grow by 2% or 4%.
The OBR has forecasted that, in cash terms, both receipts and GDP (Gross Domestic Product is the total monetary value of all final goods and services produced within the UK) will tend to rise over time because of economic growth and inflation, making more estates fall outside the Nil Rate Band. Likewise, the proposed changes from April 2026 will restrict Agricultural Property Relief (APR) and Business Property Relief (BPR) to £2.5 million, with ay assets exceeding this amount receiving 50% relief.
Whilst asset prices rise, these tax policies remain the same, making inheritance tax more impactful than it would otherwise be. The government reported between that between 2022- 2023 there were 31,500 tax paying inheritance tax paying estates, this predicted to increase significantly. HMRC have said that the impact of this will be an increase the number of taxpaying estates by 1,400 in 2028-29 and 2,900 in 2029-30 amplifying the overall tax take.
How we can help
Our Wills, Probate, Tax & Trusts team offers specialist guidance on Wills and Estate planning, including Trusts and lifetime tax planning. We work with you to ensure your will meets all legal requirements and accurately reflects the full scope of your property and assets. We can also advise on the inheritance implications of your estate and, where Inheritance Tax is due, explain the available options for managing and paying it.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
