The UK's inheritance tax landscape is about to get a lot more expensive for many families, with a staggering £700 million extra forecast in tax revenue. But who will bear the brunt, and why?
HMRC's Inheritance Tax Windfall:
The Office for Budget Responsibility (OBR) has significantly increased its Inheritance Tax (IHT) forecast, predicting an additional £0.7 billion in revenue. This surge is linked to impending changes that will impact tens of thousands of families, who are about to lose a valuable tax advantage.
The Looming Changes:
From April 2027, pension pots will be subject to IHT, as per Chancellor Rachel Reeves' 2024 Budget reforms. This shift will expose a larger portion of many families' estates to the 40% tax levy, especially those who previously relied on pensions as a tax-efficient inheritance tool.
The Perfect Storm:
And here's where it gets controversial. While the tax net is widening, thresholds remain frozen. Rising property prices are dragging more middle-income households into the IHT bracket, no longer just affecting the super-rich. The OBR predicts over 16,000 estates will be valued at over £2 million by 2030/31, significantly boosting tax revenue.
The Impact:
The revised figures show a £100 million increase for 2027/28 and an additional £200 million annually for each subsequent year until 2030/31. This means HMRC is set to collect a total of £70.6 billion in IHT over the next five years, a substantial rise from the Autumn Budget 2025 forecast.
A Little-Known Tax Trap:
A lesser-known aspect is the residence nil rate band, a £175,000 allowance that disappears at a rate of £1 for every £2 above the £2 million threshold. This can result in a substantial tax bill for estates valued above this level, as highlighted by NFU Mutual's Sean McCann.
Professional Advice is Key:
Emma Walker, a retirement specialist, emphasizes the complexity of estate planning and the importance of professional financial advice. With the changing landscape, many families may find themselves unexpectedly caught in the IHT net, facing substantial bills.
The Bottom Line:
The inclusion of pensions in IHT and the frozen thresholds create a perfect storm, affecting a broader range of individuals and couples. This situation prompts the question: Is the current IHT system fair, and what changes could make it more equitable for all?
