Get ready for a significant financial shift: the UK's taxman is set to collect an extra £700 million from inheritance tax, as a crucial tax break is on its way out for countless families!
It appears the government is anticipating a substantial boost to its coffers, with the Office for Budget Responsibility (OBR) now forecasting an additional £0.7 billion in Inheritance Tax (IHT) revenue. This comes at a time when tens of thousands of families are facing the prospect of losing a valuable tax advantage that has helped them pass on wealth more efficiently.
The numbers are in, and they paint a clear picture: Fresh figures released with the recent Spring Statement indicate that the Treasury is projected to collect a staggering £70.6 billion in Inheritance Tax between the tax years of 2025/26 and 2030/31. This revised figure represents an increase of £700 million compared to the predictions made during the Autumn Budget of 2025.
So, what's driving this surge in expected tax revenue? The primary catalyst is a major upcoming change for savers. Starting from April 2027, pension pots will be brought under the umbrella of Inheritance Tax. This significant reform, announced by Chancellor Rachel Reeves in her 2024 Budget, means that many families who have historically relied on pensions as a tax-efficient vehicle for wealth transfer may find a larger portion of their estate subject to the 40 per cent inheritance tax levy.
But here's where it gets even more complex: this isn't the only factor at play. Frozen tax thresholds – meaning the amount of wealth you can pass on tax-free hasn't increased in years – combined with rising property prices are steadily pulling more estates into the IHT net. The OBR anticipates that by 2030/31, over 16,000 estates will be valued at more than £2 million, further contributing to the increased tax take. This means that inheritance tax is increasingly impacting middle-income households, not just the ultra-wealthy, leading to more families facing unexpected tax bills.
Emma Walker, director at retirement specialist Just Group, aptly noted, "The OBR forecasts shine a light on how lucrative inheritance tax is becoming for the Treasury, uprating its projected tax take by £0.7billion over the next five years to £70.6billion." She further elaborated that annual IHT receipts are expected to climb from £8.7 billion this year to a substantial £14.7 billion by 2030/31. The revised figures show incremental increases, with an extra £100 million expected in 2027/28, followed by an additional £200 million annually for each subsequent year up to 2030/31.
Ms. Walker pointed out that the combination of frozen thresholds and escalating asset values has been a steady driver of increased inheritance tax revenue for some time. "The recent changes to the regime announced in the 2024 Autumn Budget bringing pensions into the scope of IHT will likely accelerate this trend," she stated. She also added a crucial observation: "With more and more estates now forecast to incur Inheritance Tax by the end of the decade, it is clear that the tax is no longer restricted to the very wealthy and is beginning to take a bigger bite out of middle Britain's wealth."
Families are now facing a double whammy – the impact of rising house prices coupled with the pension changes that will take effect next year. And this is the part most people miss: a lesser-known tax trap can strip estates of their residence nil rate band (an additional allowance for your main home) once they exceed £2 million in value. This valuable allowance of up to £175,000 diminishes by £1 for every £2 above the £2 million threshold, disappearing entirely for individuals at £2.35 million or for couples at £2.7 million.
Wealth manager Quilter estimates that 5,613 estates will surpass the £2 million mark by 2027-28, a figure expected to rise to 16,000 by 2030-31. For context, HMRC data reveals that only 3,620 estates liable for IHT exceeded this level in 2022-23.
Sean McCann from NFU Mutual illustrated the stark reality: a single person with a £2 million estate plus a £500,000 pension currently faces an IHT bill of £600,000. However, from April 2027, this bill could jump to £870,000. Mr. McCann warned that bringing pensions into the inheritance tax net could effectively strip families of their tax-free allowance on the family home, creating "a triple blow to many" when combined with potential income tax charges for beneficiaries.
Given these impending changes, Ms. Walker strongly advises individuals to obtain current valuations of their estates, including property assessments, to accurately understand their potential 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 recommended.
Alex Pugh, a financial planner at Saltus, echoed these concerns, warning that the inclusion of pensions in Inheritance Tax from April 2027 will "really shift the dial" and draw more families into the tax net. He explained, “Many people will drift into the tax net without realising it… In truth, any individual or couple could now be affected. Even those who never considered themselves ‘wealthy’. It’s a perfect storm created by rising asset values and outdated tax limits.”
He highlighted that older homeowners, unmarried couples, and those who have made significant gifts could be particularly vulnerable, especially with tax thresholds remaining unchanged since 2009. To illustrate the financial impact, he provided an example: an unmarried individual with £20,000 in savings, a £290,000 home, and a £145,000 pension would currently expect no IHT bill. However, from 2027, they could face a bill of around £52,000. Similarly, a married couple with a £500,000 home, £100,000 in cash, £200,000 in ISAs, and £400,000 in pensions could see a bill of approximately £80,000 upon the second death.
But here's where it gets controversial: Is it fair for the government to increase tax revenue by making it harder for families to pass on their hard-earned assets, especially when economic conditions are already challenging? Should tax thresholds be regularly reviewed to reflect inflation and rising asset values, or is this a necessary measure to fund public services? What are your thoughts on these upcoming changes and their impact on 'middle Britain'? Let us know in the comments below!
