Get ready for a significant shake-up in how families pass on their wealth! The UK government's tax authority, HMRC, is poised to collect an extra £700 million in Inheritance Tax (IHT) over the next few years, and a major reason for this surge is the impending loss of a crucial tax advantage for tens of thousands of families. This isn't just about the ultra-wealthy anymore; it's starting to affect everyday households.
The Office for Budget Responsibility (OBR) has revised its IHT projections upwards, anticipating a total collection of £70.6 billion between the tax years 2025/26 and 2030/31. This is a notable increase of £700 million compared to previous forecasts.
But here's where it gets controversial... A significant driver behind this forecast is a major policy shift impacting pension pots. Starting in April 2027, Chancellor Rachel Reeves announced in the 2024 Budget that pension savings will no longer be automatically exempt from Inheritance Tax. For many years, pensions have served as a tax-efficient vehicle for wealth transfer, allowing families to pass on assets without them being subject to the hefty 40% IHT levy. This change means that more of these hard-earned savings could now be vulnerable to taxation, potentially leaving beneficiaries with a smaller inheritance.
And this is the part most people miss... It's not just the pension changes. A perfect storm is brewing due to frozen tax thresholds and steadily rising property prices. These factors are gradually pulling more estates into the IHT net. The OBR predicts that by 2030/31, over 16,000 estates are expected to be valued at more than £2 million, further boosting the tax revenue.
When tax thresholds remain stagnant while the value of assets like homes and investments climbs, Inheritance Tax begins to impact not just the wealthiest, but also middle-income families. This means more households could be facing unexpected tax bills upon the passing of a loved one.
Emma Walker, director at retirement specialist Just Group, aptly summarized the situation: "The OBR forecasts shine a light on how lucrative inheritance tax is becoming for the Treasury, uprating its projected tax take by £0.7billion over the next five years to £70.6billion." She further noted that annual IHT receipts are projected to climb from £8.7 billion this year to a staggering £14.7 billion by 2030/31. The revised figures indicate increases of £100 million for 2027/28 and £200 million annually for each year thereafter until 2030/31.
Ms. Walker elaborated that the combination of frozen thresholds and increasing asset values has been a long-standing contributor to the rise in IHT revenue. "The recent changes to the regime announced in the 2024 Autumn Budget bringing pensions into the scope of IHT will likely accelerate this trend," she stated. She also emphasized, "With more and more estates now forecast to incur Inheritance Tax by the end of the decade, it is clear that the tax is no longer restricted to the very wealthy and is beginning to take a bigger bite out of middle Britain's wealth."
So, families are now facing a double whammy: the continued rise in house prices and the upcoming pension tax reforms. It's a challenging landscape for financial planning.
A subtle, yet significant, tax trap: Did you know that a valuable allowance, known as the residence nil rate band (worth an additional £175,000), can be lost if an estate exceeds £2 million? This allowance tapers away, disappearing entirely for individuals with estates valued over £2.35 million or couples with estates over £2.7 million. Wealth manager Quilter estimates that 5,613 estates will exceed the £2 million mark by 2027-28, a figure expected to grow to 16,000 by 2030-31. For context, HMRC data shows that only 3,620 estates liable for IHT exceeded this threshold in 2022-23.
Sean McCann from NFU Mutual illustrated the impact: a single person with a £2 million estate plus a £500,000 pension would currently face an IHT bill of £600,000. However, from April 2027, this bill could jump to £870,000. Mr. McCann further warned that including pensions in the IHT calculation could also impact the tax-free allowance on the family home, creating a "triple blow" when combined with potential income tax charges for beneficiaries.
Given these changes, Ms. Walker strongly advises individuals to get up-to-date valuations of their estates, including property assessments, to understand their potential IHT exposure. "Estate planning is complex and professional financial advice can be immensely helpful for people who want to manage their estate efficiently and pass on the maximum inheritance to loved ones," she recommended.
Alex Pugh, a financial planner at Saltus, echoed these concerns, warning that bringing pensions into IHT from April 2027 will "really shift the dial" and draw more families into the tax net. He explained, “Many people will drift into the tax net without realising it… In truth, any individual or couple could now be affected. Even those who never considered themselves ‘wealthy’. It’s a perfect storm created by rising asset values and outdated tax limits.”
He highlighted that older homeowners, unmarried couples, and those who have made substantial gifts could be particularly vulnerable, especially with tax thresholds frozen since 2009. To illustrate the financial implications, he provided an example: an unmarried person with £20,000 in savings, a £290,000 home, and a £145,000 pension would currently expect no IHT bill. However, from 2027, they could face a bill of around £52,000. Similarly, a married couple with a £500,000 home, £100,000 in cash, £200,000 in ISAs, and £400,000 in pensions could see a bill of approximately £80,000 on the second death.
What are your thoughts on bringing pensions into Inheritance Tax? Do you believe this is a fair way to increase government revenue, or does it place an undue burden on families trying to plan for the future? Share your opinions in the comments below!
