A looming inheritance tax crisis is set to impact thousands of families, and it's a situation that's only going to get more complex. With rising house prices and an impending raid on pensions, many estates are facing a double-whammy that could leave them with a hefty tax bill.
Let's break this down. Currently, most individuals can pass on a tax-free allowance of £325,000 when they pass away. This allowance increases to £500,000 if they leave their primary residence to a direct family member, provided the estate is valued under £2 million. Any assets left to a spouse or civil partner are also inheritance tax-free, and they can inherit each other's allowances, allowing a couple to pass on a total of £1 million tax-free.
But here's where it gets controversial: estates valued over £2 million start to lose their tax-free allowances. For every £2 that the estate's value exceeds £2 million, the residence nil rate band is reduced by £1. This means that at £2.35 million for a single person or £2.7 million for a couple, the tax-free allowance is completely wiped out.
And this is the part most people miss: from April 2027, pensions will also be liable for inheritance tax, as announced by Chancellor Rachel Reeves in her 2024 budget. At the moment, you can pass on a pension pot tax-free, and beneficiaries don't pay income tax on withdrawals if the deceased was under 75.
The impact of this change is significant. Quilter, a wealth management firm, estimates that by the 2027-28 tax year, 5,613 estates will be valued above £2 million, rising to 16,000 by 2030-31. This is a stark contrast to the 3,620 estates that were liable for inheritance tax in the 2022-23 tax year, as reported by HM Revenue & Customs.
Sean McCann from NFU Mutual highlights the impact on grieving families, stating that a single person with a £2 million estate and a £500,000 pension would face an inheritance tax bill of £600,000. From April 2027, this bill would increase to a staggering £870,000.
Wealth managers and pension experts are concerned that constant rule changes, like making pension pots liable for inheritance tax, will deter savers from putting money away for retirement. The Times Smarter with Money campaign aims to address this by boosting financial education and advocating for an end to tax rises on long-term saving.
Alex Pugh from Saltus Wealth Management sums it up: "The big danger is not just the tax bill but the erosion of savers' confidence. Tweaking pension rules and making headline-grabbing tax changes risks undermining trust in a system designed to encourage long-term saving. When people see the goalposts moving, they question the value of locking away money for decades."
So, what do you think? Is this a fair system, or does it discourage long-term planning? We'd love to hear your thoughts in the comments.
