Newly proposed changes to Inheritance Tax would see 150,000 grieving families hit with higher tax bills. The plans, announced late last year by Chancellor Rachel Reeves, mean that pension wealth could be taken into account when calculating the size of an estate. The changes would take affect from April 2027.
According to data from a Freedom of Information request, the new rules would force 31,200 families to pay Inheritance Tax (IHT) for the first time by 2030. Additionally, 121,500 families who already fall into the IHT net would see their bills increase.
Currently, IHT is charged at 40% on estates which exceed the £325,000 nil-rate band. Under the new rules:
- An individual with a mortgage-free home worth £300,000 and a £100,000 pension would face a £30,000 bill.
- If their pension were worth £300,000, their IHT liability would rise to £110,000.
This change means that even estates with modest assets and pension savings could now face higher IHT liabilities.
At the moment pensions which are inherited from those who die aged 75 or older are taxed at the beneficiary’s income tax rate. From April 2027, this will change – IHT will be deducted first, and beneficiaries will then pay Income Tax as funds and withdrawn. This double hit of tax could mean up to 90% of marginal tax is paid on inherited pensions.
The Office for Budget Responsibility (OBR) estimates that in 2027-28, the average Inheritance Tax bill will rise by £34,000 if pension assets are included. This means the average estate will pay £169,000 in IHT. Inheritance Tax is already providing a lucrative income stream for the government, with £6.3 billion raised between April and December 2024, a £600 million rise from the same period in 2023.
Pensions have always been a tax-efficient way to pass on wealth, but these changes could create a significant penalty for many families, and even discourage people from saving for retirement.
To review your Inheritance Tax liability please get in touch to discuss your circumstances.