The UK's inheritance tax landscape is about to get a lot more expensive for many families, with a staggering £700 million forecast in additional revenue for HMRC. But here's the catch: it's not just the super-rich who will feel the pinch.
The Office for Budget Responsibility's (OBR) latest forecast reveals a £0.7 billion increase in Inheritance Tax (IHT) revenue, leaving tens of thousands of families on the brink of losing a significant tax benefit. This forecast is a stark contrast to the Autumn Budget 2025, where a different picture was painted.
The Treasury's IHT collection is projected to reach £70.6 billion between 2025/26 and 2030/31, a substantial increase of £700 million. This surge is attributed to the upcoming inclusion of pension pots in IHT, as announced by Chancellor Rachel Reeves in her 2024 Budget reforms.
But here's where it gets controversial: This change will significantly impact families who previously used pensions as a tax-efficient wealth transfer tool. With the 40% levy now potentially applying to a larger portion of their estate, the financial burden on these families will be considerable.
Simultaneously, frozen thresholds and rising property prices are ensnaring more estates in the tax net. The OBR predicts over 16,000 estates will surpass the £2 million mark by 2030/31, further boosting tax revenues. This trend is particularly concerning as it increasingly affects middle-income households, not just the ultra-wealthy.
Emma Walker, director at Just Group, highlights the growing profitability of IHT for the Treasury, with a projected £0.7 billion increase in revenue over the next five years. Annual IHT receipts are expected to soar from £8.7 billion this year to a staggering £14.7 billion by 2030/31.
The revised figures show a £100 million increase for 2027/28 and a £200 million annual rise for each subsequent year until 2030/31. This means HMRC is set to collect an extra £700 million in IHT as thousands of families lose a crucial tax allowance.
Ms. Walker emphasizes that frozen thresholds and rising asset values have been driving up IHT revenues for some time. The 2024 Autumn Budget's changes, which bring pensions into the IHT scope, will likely exacerbate this trend.
The impact is far-reaching: With more estates expected to incur IHT by the end of the decade, it's clear that the tax is no longer confined to the super-rich. Middle-class families are increasingly feeling the pinch, facing unexpected tax bills.
Families are now caught between rising house prices and the impending pension changes. While some gifts and property are exempt from IHT, a lesser-known tax trap lurks, stripping estates of their residence nil-rate band once they exceed £2 million in value. This additional £175,000 allowance diminishes at a rate of £1 for every £2 above the threshold, disappearing entirely at £2.35 million for individuals and £2.7 million for couples.
Wealth manager Quilter predicts that 5,613 estates will surpass the £2 million mark by 2027-28, rising to 16,000 by 2030-31. HMRC data for 2022-23 shows that only 3,620 estates liable for IHT exceeded this level. The consequences are significant, as Sean McCann from NFU Mutual illustrates: a single person with a £2 million estate and a £500,000 pension currently faces a £600,000 bill, which will jump to £870,000 from April 2027.
Mr. McCann warns that including pensions in IHT could result in families losing their tax-free allowance on the family home, creating a triple financial blow when combined with potential income tax charges on beneficiaries.
Ms. Walker advises individuals to obtain current valuations of their estates, including property assessments, to understand their IHT exposure. She emphasizes the complexity of estate planning and the value of professional financial advice in maximizing inheritance for loved ones.
Alex Pugh, a financial planner at Saltus, warns that the inclusion of pensions in IHT from April 2027 will significantly broaden the tax net. He highlights that many people may unknowingly fall into this net due to rising asset values and outdated tax limits. Older homeowners, unmarried couples, and those who have made substantial gifts are particularly vulnerable.
Pugh provides a striking example: An unmarried person with modest savings, a home, and a pension could face a £52,000 bill from 2027, compared to no bill currently. A married couple with a mix of assets could see an IHT bill of about £80,000 on the second death.
The question remains: Is this a fair and balanced approach to taxation, or are middle-income families bearing the brunt of a system that was once designed for the ultra-wealthy? Share your thoughts in the comments below.
