Get ready for a financial wake-up call! The UK's tax authorities are set to rake in an extra £700 million in inheritance tax, and it's not just the ultra-wealthy who are feeling the pinch. This controversial move is leaving thousands of families reeling as they lose a key tax allowance.
The Office for Budget Responsibility has revealed a staggering £0.7 billion increase in their inheritance tax forecast. Tens of thousands of families are bracing for the impact of this change, which could see their hard-earned wealth significantly reduced.
The figures speak for themselves: the Treasury expects to collect a whopping £70.6 billion in inheritance tax between 2025/26 and 2030/31. That's a £700 million jump from the previous forecast at the Autumn Budget 2025.
But here's where it gets controversial... From April 2027, pension pots will be subject to inheritance tax, a major shift announced by Chancellor Rachel Reeves. This means families who relied on pensions as a tax-efficient inheritance strategy may now face a 40% levy on their estates.
And this is the part most people miss: frozen thresholds and rising property prices are pushing more estates into the tax net. The OBR predicts over 16,000 estates will be worth over £2 million by 2030/31, further boosting the tax take.
With asset values climbing and thresholds remaining unchanged, inheritance tax is increasingly affecting middle-income households. This trend is pushing up revenues and leaving more families with unexpected tax bills.
Emma Walker, director at retirement specialist Just Group, highlights the lucrative nature of inheritance tax for the Treasury. She states, "The OBR forecasts show an uprating of £0.7 billion over five years, reaching £70.6 billion."
Annual receipts are predicted to soar from £8.7 billion this year to £14.7 billion by 2030/31. The revised figures indicate a steady increase, with £100 million more expected in 2027/28 and an additional £200 million annually thereafter.
But there's a little-known tax trap that compounds the issue. Once an estate exceeds £2 million in value, the residence nil rate band allowance disappears. This additional £175,000 allowance vanishes at a rate of £1 for every £2 above the threshold, completely disappearing at £2.35 million for individuals or £2.7 million for couples.
Wealth manager Quilter estimates that by 2030-31, 16,000 estates will surpass the £2 million mark. In comparison, HMRC data shows only 3,620 estates exceeded this level in 2022-23.
Sean McCann from NFU Mutual illustrates the impact: a single person with a £2 million estate and a £500,000 pension currently faces a £600,000 bill, which jumps to £870,000 from April 2027.
Mr. McCann warns that including pensions in the inheritance tax net could strip families of their tax-free allowance on the family home, creating a triple financial blow when combined with potential income tax charges on beneficiaries.
Ms. Walker urges people to obtain current valuations of their estates, including property assessments, to understand their potential inheritance tax exposure. She emphasizes the complexity of estate planning and the value of professional financial advice to efficiently manage estates and maximize inheritances for loved ones.
Alex Pugh, a financial planner at Saltus, warns that bringing pensions into the inheritance tax fold from April 2027 will "really shift the dial," pulling more families into the tax net. He highlights that rising asset values and outdated tax limits create a perfect storm, affecting individuals and couples who may never have considered themselves wealthy.
Older homeowners, unmarried couples, and those who have made large gifts are particularly vulnerable, especially with thresholds frozen since 2009.
The sums involved can be significant. For example, an unmarried person with £20,000 in savings, a £290,000 home, and a £145,000 pension could face a £52,000 bill from 2027 onwards. A married couple with a £500,000 home, £100,000 in cash, £200,000 in ISAs, and £400,000 in pensions could see an £80,000 bill upon the second death.
So, what do you think? Is this a fair tax measure, or does it disproportionately affect the middle class? Share your thoughts in the comments below!
