Where Does Inheritance Tax Go? Understanding What Happens to Your Money After It’s Paid

When inheritance tax (IHT) is due, the financial blow to families can be significant, often running into tens or even hundreds of thousands of pounds.

Understandably, one of the most common and emotionally charged questions people ask is:

Where does inheritance tax actually go?

It’s not just a practical question - it’s a moral one.

If your estate is taxed at 40% above certain thresholds, what happens to that money? Is it used for something meaningful? Does it help the people you love, or simply vanish into a government black hole?

At Belgravia Capital Wealth Management, we help clients not only reduce or eliminate inheritance tax but also understand how the tax system works.

In this blog, we’ll explain where your inheritance tax payments go, what they’re used for, and what this means for families planning their financial legacy.

How Inheritance Tax Works: A Quick Recap

Before diving into where the money goes, let’s briefly recap how IHT functions in the UK:

• IHT is charged at 40% on the value of an estate above the nil-rate band (£325,000 as of 2025).

• An additional £175,000 residence nil-rate band may apply when a main home is passed to direct descendants.

• For married couples or civil partners, both allowances are transferable, allowing up to £1 million to be passed on tax-free.

• Everything above that threshold is potentially taxed unless specific reliefs apply (e.g. business or agricultural relief).

So where does all this tax money go?

Where Inheritance Tax Revenue Goes: Straight to HM Treasury

When inheritance tax is collected from an estate, the money goes directly to HM Treasury, which is responsible for the UK’s central government finances. It is not ringfenced for any specific department or service.

From there, IHT revenue becomes part of the Consolidated Fund, the main bank account used to finance all government spending - from defence to education, the NHS, public pensions, and everything in between.

In other words:

Inheritance tax is treated as general revenue and used across all public services, not for any one purpose.

How Much Inheritance Tax Does the Government Collect?

Although inheritance tax affects relatively few estates (around 4–6% of deaths), it generates a surprisingly large amount of revenue for HM Treasury - and it’s growing.

📊 Key figures:

• In 2022–23: Over £7.1 billion was collected from inheritance tax

• In 2023–24: Provisional figures show £7.5 billion+, a new record

• Projections suggest IHT revenue could exceed £8 billion per year by 2026, due to frozen thresholds and rising property values

This sharp increase is driven by:

• Rising property prices, especially in the South East and London

• Frozen nil-rate bands since 2009, causing “fiscal drag”

• More estates breaching the £2 million taper threshold for the residence nil-rate band

• Upcoming caps to business and agricultural reliefs

All this means more families than ever are affected, and contributing more to government coffers.

What Does the Government Use Inheritance Tax For?

Because inheritance tax revenue isn’t earmarked for a specific purpose, it gets mixed into the central spending pot. That pot is then divided across various government departments and priorities.

Your inheritance tax might fund:

• NHS hospitals and GP surgeries

• State pensions and elderly care

• Education and school services

• Defence and national security

• Transport infrastructure

• Local authority budgets

• Debt repayments on government borrowing

So while you may not see a direct “benefit” from your IHT payment, it contributes to the overall functioning of public life in the UK, for better or worse, depending on your political view.

Why Doesn’t Inheritance Tax Go Straight to Inheritance Services or the NHS?

It’s a fair question. You might assume that inheritance tax would be used specifically to support older generations, or even NHS services for the elderly - but that’s not how the UK’s tax system works.

All major tax revenues, including income tax, VAT, corporation tax, and inheritance tax, are pooled together to give the Treasury flexibility in spending based on current priorities.

There are no hypothecated (ringfenced) taxes in the UK except for a few exceptions (like some fuel duties used for road maintenance).

Is Inheritance Tax Fair? A Contested Issue

Where the tax goes is often less of a concern than whether the tax itself is fair in the first place.

Opponents argue that:

• It’s a double tax - money earned and taxed during life is taxed again on death

• It hits middle-class families, especially in high-property-value areas

• It punishes those who try to leave a legacy for their children

• It disproportionately affects small business owners and farmers

Supporters argue that:

• It’s a progressive tax, levied only on the wealthiest estates

• It helps fund vital public services

• It reduces inherited wealth inequality

• It encourages philanthropy, with incentives for charitable giving

Whichever side of the debate you fall on, it’s important to understand the system before deciding how to plan around it.

Will Inheritance Tax Be Reformed or Replaced?

Inheritance tax has been under review and reform pressure for years. While there’s no current move to abolish it outright, major changes are already in motion:

• From April 2026, Business Property Relief and Agricultural Relief will be capped at £1 million per person

• AIM shares lost 100% relief in the 2024 Autumn Budget and now receive only 50%

• From April 2027, unused defined contribution pensions will be included in the estate for IHT purposes

These changes are expected to increase the number of taxable estates and the revenue collected - making it even more critical to plan ahead.

How to Reduce What Goes to the Treasury

If the thought of your life’s work going into the Treasury’s general pot doesn’t sit well with you, the good news is that there are legitimate ways to reduce your inheritance tax bill, and make sure more of your wealth goes to your family or causes you care about.

Common strategies include:

• Gifting early: Use the 7-year rule to move assets out of your estate

• Annual exemptions: £3,000 per year, £250 per person, and wedding gifts

• Trusts: Can reduce your estate’s value if used correctly

• Life insurance in trust: To cover the tax bill without increasing estate size

• Leave 10% to charity: Reduces your overall IHT rate from 40% to 36%

• Equalise estates between spouses to maximise allowances

The most effective plans are bespoke and built years in advance. That’s where we come in.

How Belgravia Capital Wealth Management Can Help with Inheritance Tax Planning

At Belgravia Capital Wealth Management, we provide:

• Detailed inheritance tax forecasts

• Strategic gifting and estate restructuring

• Trust planning and implementation

• IHT-efficient investment solutions

• Coordination with legal professionals for seamless execution

Our goal is simple: help you protect your legacy and pass on as much of your estate as possible to those you choose, not the government.

Conclusion: Where Does Inheritance Tax Go?

Inheritance tax goes to HM Treasury, where it becomes part of the UK government’s general budget for public services. It is not earmarked for any specific purpose, which can be frustrating for families paying large sums.

Whether or not you agree with the principle of IHT, the reality is clear: the tax applies when you cross specific thresholds, and it can take a substantial portion of your estate.

But with early, strategic planning, much of it can be avoided or minimised.

Let’s make sure your wealth doesn’t disappear into a faceless fund.

📩 Contact Belgravia Capital Wealth Management today at contact@belgraviacapital.co.uk for expert advice on how to protect your estate from unnecessary inheritance tax.