‘Fiscal Drag’ pulls more UK Taxpayers into higher rate bands 

Inheritance Tax (IHT) has long been seen as a levy on the wealthy. But increasingly, it’s affecting more and more individuals and families. One of the key reasons for this is a concept known as ‘fiscal drag’.

What is fiscal drag?

Fiscal drag is a direct consequence of when tax thresholds and allowances fail to rise in line with inflation or asset growth. In the context of IHT, it means that as asset values increase (e.g. property prices), more estates are becoming liable for tax – even though the individuals involved haven’t necessarily become “wealthier” in real terms.

It’s a silent creep, gradually pulling more estates into the IHT net.

The main threshold for IHT – the nil-rate band (NRB) – has been frozen at £325,000 since 2009; that’s over 16 years without any adjustment for inflation.

Meanwhile, average UK house prices have risen significantly over that period, and in many cases, a family home alone can take up most or all of the nil-rate band.

There is also a residence nil-rate band (RNRB), currently up to £175,000, which may be available when passing a main residence to direct descendants. But even with this, the combined threshold of £500,000 per person (or £1 million per married couple) hasn’t moved since 2020 – and is also frozen until at least April 2030.

What does this mean for you?

As asset values continue to rise, increasingly more estates are exceeding the IHT threshold, even if their owners wouldn’t consider themselves wealthy. That’s the core of fiscal drag: people aren’t necessarily earning or inheriting more in real terms, but they’re being taxed as if they are.

HMRC’s figures show that IHT receipts have reached record highs at £8.2bn in the year to 5 April 2025, up from £7.5bn in 2023/24, and £7.1 bn in 2022/23. The Treasury is benefiting from the effects of fiscal drag and, unless thresholds are reviewed, this trend is only likely to continue.

IHT is no longer solely a concern for the wealthiest individuals – it has become a mainstream planning issue that needs broader consideration. The proposed inclusion of pensions within individuals’ chargeable estates from April 2027 further exacerbates the challenge, potentially drawing even more estates into the IHT net.

What about the impact on business owners?

No doubt you will have read about the proposed IHT changes to Business Relief (“BR”) announced in the October 2024 Budget, which are due to take effect from 6 April 2026, albeit with transitional rules applying in the interim. The proposed changes will significantly limit the IHT advantages previously available to business owners.

Whilst the current rules on IHT are anything but straightforward, there is a widely understood principle that if you owned shares in a trading company/group, the shares could effectively pass on to the next generation free from IHT. ​How this is obtained is through a relief known as BR.

Under the current rules, the availability of BR depends on the nature of the business asset. However, shares in an unquoted trading company/group can typically qualify for 100% relief with no upper limit.​ This means that the value of the shares is fully exempt from IHT provided the relevant qualifying criteria are met.​

From 6 April 2026, BR will be restricted to the first £1 million of qualifying assets, with 50% of the excess over £1 million subject to IHT at 40% (an effective rate of 20% on the excess over £1 million).

This is a significant change and could create liquidity issues if estates are forced to extract cash from a company to meet their IHT liabilities – reducing what can be passed on to the next generation and placing pressure on the business itself.​

As a result, there is a clear and urgent need for shareholders to review their succession and estate planning well before the new rules come into effect in April 2026.​

Next Steps?

As thresholds remain frozen, asset values continue to grow, and reliefs become restricted, proactive planning becomes more important than ever. There is no one-size-fits-all solution for succession planning. Every individual’s circumstances are unique, and, as a result, careful, tailored advice is essential to implement strategies that are appropriate, effective and aligned with both their personal wishes and the interests of the business (where applicable).  Should you require any assistance in advising you on your personal circumstances, please do not hesitate to contact Tom Andrew, Emily Robson or a member of our Private Client Team.