153,000 estates face new or extra IHT liability between 2027-30

• Under current proposals, pensions will be included in the value of a member’s estate for IHT purposes starting from April 2027
• interactive investor calculates that someone with a mortgage-free property worth £300,000 and a pension worth £100,000 would face an IHT liability of £30,000 from April 2027, rising to £110,000 for pensions valued at £300,000
• This assumes that the full nil-rate band (£325,000) is available and that the additional residence nil-rate band (£175,000) does not apply.

Almost 153,000 estates would be subject to inheritance tax (IHT) or face additional IHT if measures to include pensions in IHT calculations, announced in the Autumn Budget, are implemented, according to a new Freedom of Information (FOI) request by interactive investor.

In her maiden Budget in October, Chancellor Rachel Reeves unveiled plans to include unused pension funds and death benefits payable from pensions in the value of a member’s estate for IHT purposes, starting from April 2027.

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According to data from the Office for Budget Responsibility (OBR), if the proposal is enacted, an additional 31,200 estates will become liable for IHT from the 2027-28 tax year until the end of the 2029-30 tax year, while a further 121,500 estates will face an increased IHT liability.

In the 2027-28 tax year alone, the average IHT liability is expected to be £169,000*, increasing by around £34,000 when pension assets are included in the value of the estate, according to OBR estimates.

The OBR estimates do not account for potential behavioural changes following the announcement of these measures, such as individuals drawing down pension funds more quickly and/or making greater use of exemptions or reliefs to reduce their estate’s overall IHT liability.

Source: OBR/interactive investor

The change means that the estates of individuals with relatively modest assets and pension savings could face a new IHT liability. interactive investor calculates that someone with a mortgage-free property worth £300,000 – just above the national average recorded by the ONS (currently £290,000) – and a pension worth £100,000 would face an IHT liability of £30,000 from April 2027, rising to £110,000 for pensions valued at £300,000.

The calculations assume the full nil-rate band (£325,000) is available and that the additional residence nil-rate band (£175,000) does not apply.

Source: interactive investor. Assumptions - full nil rate band is available, and no residence nil rate band is available.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The government appears to be tightening the screws on inheritance tax, effectively widening the net to capture more estates. With thresholds such as the nil-rate band frozen for years amid rising property prices and inflation, it’s no surprise that more families - many of whom wouldn’t consider themselves wealthy - are being caught in the IHT net. The net will be bursting at the seams by the end of the decade if the latest proposals come to fruition.

“This isn’t just about the wealthiest bearing the burden; it’s part of a broader strategy to replenish the public purse. However, it risks putting additional pressure on middle-class households, who are already navigating stretched finances.

“Including pensions in inheritance tax calculations would mark a seismic shift, particularly for those who have meticulously crafted estate plans around the current rules. Pensions have long been considered a tax-efficient vehicle for passing on wealth, with many relying on their flexibility and exemptions as part of their broader estate strategy. This change would force many to rethink their plans entirely, potentially accelerating drawdowns during their lifetime to reduce tax exposure. It could also undermine the incentive to save into pensions, disrupting long-term financial security for future generations.”

Government proposals

Currently, it is possible to pass on £325,000 without paying IHT (the nil-rate band, or NRB). This allowance can be increased by an additional £175,000 if you pass a family home to direct descendants (the residence nil-rate band, or RNRB). These allowances will remain frozen at their current levels until 2030.

After April 2027, if the total value of your estate (including any remaining pensions) exceeds the nil-rate band (and the residence nil-rate band if passing on a family home to children or grandchildren), IHT will likely become payable.

For those who die aged 75 or older, any pensions inherited by beneficiaries will also be subject to income tax at the beneficiary’s marginal rate. This will apply after IHT has been deducted, as beneficiaries withdraw income or lump sums from the inherited pension.

As a result, inherited pensions could be subject to “double taxation,” creating an effective tax rate of 52% for pension pots passed on to basic-rate taxpayers, rising to 64% and 67% for higher- and additional-rate taxpayers, respectively.

interactive investor has called on the chancellor to explore alternative measures proposed by the pensions industry as part of the consultation process.

Richard Wilson, CEO of interactive investor, says: “The current proposals are an affront to people who have done the right thing by diligently investing through a pension throughout their working lives to ensure financial resilience in retirement, while also taking proactive steps to create an effective estate plan that complies with existing tax rules.

“They undermine the already fragile confidence in the pensions system and could drive decisions that undermine long-term financial security.

“Including pensions in inheritance tax calculations creates the prospect of double taxation, where the pension pot exceeds the IHT threshold, and the beneficiary is taxed again at their marginal income tax rate. This isn’t right, and we urge the government to collaborate with us and the broader pensions industry to develop a simple ‘one tax’ solution.”

Increasing IHT burden by 2030 

• According to HMRC, there were 27,800 estates that paid IHT in the 2021-22 tax year (the most recent figures available), an increase of 800 (3%) since the 2020-21 tax year.
• IHT receipts are expected to rise to £8.3 billion in 2024-25, a 10.7% increase from the previous tax year, according to the OBR.
• The OBR expects the policy changes announced in the October Budget to generate an additional £2.5 billion in receipts by 2029-30. These include charging IHT on pension wealth transferred at death, limiting agricultural and business reliefs, and extending the freeze on nil-rate bands until 2029-30.
• As a result of these changes, the proportion of estates subject to IHT is projected to rise from 5.2% in 2023/24 to 9.5% in 2029-30, while the average tax bill for estates liable for IHT is expected to remain roughly unchanged.