The UK's tax authorities, HMRC, are set to reap an additional £700 million in inheritance tax, as tens of thousands of families face the loss of a crucial tax allowance. This forecast, released by the Office for Budget Responsibility (OBR), indicates a significant increase in expected inheritance tax revenues, with the Treasury projected to collect £70.6 billion in inheritance tax between 2025/26 and 2030/31. This is a substantial £700 million more than initially predicted at the Autumn Budget 2025.
The primary driver of this increase is a series of reforms announced by Chancellor Rachel Reeves in her 2024 Budget. From April 2027, pension pots will fall within the scope of inheritance tax, a significant shift for many families who have traditionally relied on pensions as a tax-efficient way to pass on wealth. This change means that more estates will be exposed to the 40% levy, potentially impacting a broader range of households.
Additionally, frozen thresholds and rising property prices are contributing to the widening tax net. The OBR expects over 16,000 estates to be worth over £2 million by 2030/31, further increasing the tax take. This trend is particularly concerning for middle-income households, as inheritance tax is increasingly affecting them rather than just the very wealthy.
Emma Walker, director at retirement specialist Just Group, highlighted the impact of these changes. "The OBR forecasts shine a light on how lucrative inheritance tax is becoming for the Treasury, uprating its projected tax take by £0.7 billion over the next five years to £70.6 billion," she said. Annual receipts are forecast to climb from £8.7 billion this year to £14.7 billion by 2030/31.
The revised figures also show increases of £100 million for 2027/28 and £200 million annually for each subsequent year through to 2030/31. This surge in inheritance tax revenues is set to have a significant impact on families, with many facing unexpected bills.
A little-known tax trap, the residence nil rate band, strips estates of their allowance once they exceed £2 million in value. This additional £175,000 allowance disappears at a rate of £1 for every £2 above the threshold, vanishing entirely at £2.35 million for individuals or £2.7 million for couples. Wealth manager Quilter estimates that 5,613 estates will surpass £2 million by 2027-28, rising to 16,000 by 2030-31.
HMRC data shows that just 3,620 estates liable for IHT exceeded this level in 2022-23. Sean McCann from NFU Mutual illustrated the impact: a single person with a £2 million estate plus £500,000 pension currently faces a £600,000 bill, jumping to £870,000 from April 2027. This change could strip families of their tax-free allowance on the family home, creating a 'triple blow' when combined with potential income tax charges on beneficiaries.
Ms. Walker urged people to obtain current valuations of their estates, including property assessments, to understand their likely IHT exposure. "Estate planning is complex, and professional financial advice can be immensely helpful for people who want to manage their estate efficiently and pass on the maximum inheritance to loved ones," she said. Alex Pugh, financial planner at Saltus, warned that bringing pensions into inheritance tax from April 2027 will 'really shift the dial' and pull more families into the tax net. He emphasized that any individual or couple could now be affected, even those who never considered themselves 'wealthy'.
The controversy surrounding these changes lies in the impact on middle-income households and the potential for families to face unexpected tax bills. The question remains: how can families best prepare for these changes and manage their estates to minimize the impact of inheritance tax?
