The UK's inheritance tax is about to hit families hard, with a staggering £700 million forecast to be collected by HMRC as a result of recent changes. But is this fair, or is it a controversial move that could impact the middle class?
The Office for Budget Responsibility has significantly increased its Inheritance Tax prediction, with an additional £0.7 billion expected to be collected. This is due to the impending loss of a crucial tax benefit for tens of thousands of families. The Treasury's latest figures reveal a projected £70.6 billion in Inheritance Tax revenue between 2025/26 and 2030/31, a substantial increase from the previous Autumn Budget 2025 forecast.
Here's where it gets controversial: the tax net is widening, and not just for the super-rich. From April 2027, pension pots will be subject to inheritance tax, as per Chancellor Rachel Reeves' 2024 Budget reforms. This means that many families who previously utilized pensions as a tax-efficient inheritance tool may now face a 40% levy on a larger portion of their estate.
And this is the part most people miss: the impact of frozen thresholds and rising property prices. With thresholds staying the same while asset values soar, more middle-income households are being drawn into the inheritance tax net. The OBR predicts over 16,000 estates will be valued at over £2 million by 2030/31, significantly increasing tax revenue and catching many families off guard.
Emma Walker, a director at Just Group, emphasizes the growing profitability of inheritance tax for the Treasury, with a £0.7 billion increase in projected revenue over the next five years. Annual receipts are expected to rise from £8.7 billion to £14.7 billion by 2030/31, a trend that is set to continue.
But there's a catch. A little-known tax rule can drastically reduce the residence nil rate band for estates valued above £2 million. This additional £175,000 allowance diminishes at a rate of £1 for every £2 over the threshold, completely disappearing at £2.35 million for individuals and £2.7 million for couples. Wealth manager Quilter estimates that 5,613 estates will surpass the £2 million mark by 2027-28, rising to 16,000 by 2030-31.
HMRC data reveals the potential impact: 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. This could leave many families struggling to pay unexpected taxes.
Financial experts warn that the inclusion of pensions in inheritance tax calculations could result in a loss of tax-free allowances on family homes, especially when combined with potential income tax charges on beneficiaries. This complex situation highlights the importance of professional financial advice for efficient estate planning and maximizing inheritances for loved ones.
So, is this a fair tax system, or is it time for a rethink? Share your thoughts in the comments below. Remember, estate planning is a crucial aspect of financial management that can significantly impact your family's future.
