The Treasury is set to collect a staggering £70.6 billion in Inheritance Tax over the next six years, a £700 million increase from previous forecasts. This significant surge in revenue is primarily attributed to the impending changes in pension pots and rising property values, which will affect tens of thousands of families. The Office for Budget Responsibility (OBR) predicts that by 2030/31, over 16,000 estates will be valued at more than £2 million, a substantial jump from the 3,620 estates liable for Inheritance Tax in 2022/23. This trend is further exacerbated by the freezing of thresholds and escalating asset values, pushing more middle-income households into the tax net. Emma Walker, director at Just Group, a retirement specialist, warns that the tax is no longer exclusive to the wealthy and is now impacting a broader segment of the population. The OBR's forecasts indicate a substantial increase in annual receipts, from £8.7 billion this year to £14.7 billion by 2030/31. This shift is largely due to the inclusion of pension pots in the Inheritance Tax scope, a reform announced by Chancellor Rachel Reeves in the 2024 Budget. As a result, many families who previously relied on pensions for tax-efficient wealth transfer may now face a 40% levy on a larger portion of their estate. Additionally, the residence nil rate band, a little-known tax trap, will be stripped from estates valued over £2 million, disappearing at a rate of £1 for every £2 above the threshold. This means that individuals with estates valued at £2.35 million or couples with estates valued at £2.7 million will lose this valuable allowance. Wealth manager Quilter estimates that by 2027/28, 5,613 estates will surpass the £2 million mark, rising to 16,000 by 2030/31. This change will have a significant impact on beneficiaries, with a single person facing a £600,000 bill that jumps to £870,000 from April 2027, as illustrated by Sean McCann from NFU Mutual. The inclusion of pensions in the Inheritance Tax net could further compound this issue, potentially stripping families of their tax-free allowance on the family home, creating a 'triple blow' when combined with potential income tax charges on beneficiaries. To navigate these complex changes, Emma Walker advises people to obtain current valuations of their estates, including property assessments, to understand their likely Inheritance Tax exposure. She emphasizes the importance of professional financial advice for effective estate planning, ensuring that individuals can manage their estates efficiently and pass on the maximum inheritance to their loved ones. Alex Pugh, a financial planner at Saltus, echoes this sentiment, warning that the changes will 'really shift the dial' and pull more families into the tax net. He highlights that rising asset values and outdated tax limits create a perfect storm, affecting even those who never considered themselves 'wealthy'. Older homeowners, unmarried couples, and those who have made large gifts are particularly exposed, especially with thresholds frozen since 2009. Pugh provides a concrete example to illustrate the potential impact: an unmarried person with £20,000 in savings, a £290,000 home, and a £145,000 pension would currently expect no bill, but from 2027, they could face around £52,000. A married couple with similar assets could face a bill of about £80,000 on the second death. These changes underscore the importance of proactive estate planning and seeking professional advice to mitigate the potential financial impact on families.
