As inheritance tax continues to evolve, thousands of families in the UK are set to face substantial tax liabilities, with many potentially losing out on key reliefs. According to GB News, rising property values, frozen tax thresholds, and new pension-related changes will combine to push more estates over the £2million threshold, triggering the loss of the valuable residence nil rate band, a key exemption. This shift, expected to impact 16,000 estates by 2030, is pushing the tax burden higher for families already struggling to manage their financial affairs.
The Impact of Inheritance Tax: A Growing Concern for Families
The UK’s inheritance tax system is under pressure as more families find themselves facing substantial tax bills. The residence nil rate band, which currently allows families to pass on up to £500,000 free of inheritance tax, is under threat for households with estates exceeding £2million. By 2030, the number of estates that breach this threshold is expected to rise dramatically, from just 3,620 estates in 2022-23 to over 16,000 by the end of the decade.
According to GB News, the shift is being driven primarily by two key factors: frozen tax thresholds and increasing property values. As property prices have steadily climbed, more families have found their estates worth more than expected, pushing them above the £2million mark. This means many families are in danger of losing the £175,000 residence nil rate band, a relief that could otherwise help shield their estates from hefty tax bills.
Adding to the complexity is a new rule, announced by Chancellor Rachel Reeves, that will bring pensions into the inheritance tax calculation from April 2027. This change will likely push even more estates above the £2million threshold, exacerbating the already growing tax burden.
Expert Insights on the Changing Landscape
Tax and financial planning experts have voiced concerns about how these changes will affect families. Shaun Moore, tax expert at Quilter, warned,
“Many estates are likely to be hit by the double whammy of pensions being brought into scope for inheritance tax and frozen tax allowances, and it is a tax that is going to increasingly impact estates, with the number caught out expected to rise.”
This insight suggests that families may soon find themselves facing larger bills than expected, as more assets come under tax scrutiny.
Moore continued,
“People will need to carefully manage their inheritance tax liability as a result, and while pensions used to be the last thing you would touch during your retirement when it came to drawdown, they may soon be the first you want to use.”
This highlights a significant shift in how individuals must plan their finances. While pensions were once seen as assets to be left untouched until the end of life, they may now become a crucial part of inheritance tax management.
The Financial Consequences: How Tax Bills Are Set to Increase
The real impact of these tax changes can be seen in concrete terms. For example, Sean McCann, a chartered financial planner at NFU Mutual, noted the significant increase in tax liabilities families will face once pensions are factored in. He explained,
“A single person with a £2million estate including a £500,000 pension currently faces a £600,000 inheritance tax charge, but from April next year that same estate would attract a bill of £870,000.”
This is a significant increase, amounting to an additional £270,000 in tax charges, and highlights the urgency for families to reassess their financial planning strategies.
These figures reflect a troubling trend: the increasing complexity of inheritance tax laws means that individuals must now think beyond their immediate estate and consider how their pensions, property values, and other assets will impact their inheritance tax obligations. With rising tax receipts expected, the government is on track to collect £14.5billion annually from inheritance tax by 2030, double what it is collecting now.
The Need for Advance Planning
Given the growing tax burden, experts stress that advance planning is essential to minimize the impact of inheritance tax. David Little, tax expert at wealth manager Evelyn Partners, emphasized the importance of making lifetime gifts and using available allowances to reduce future tax liabilities.
“Advance planning is essential when looking to reduce the impact of inheritance tax, and making lifetime gifts alongside the natural spending of wealth and using available allowances can all play an important role,” said Little.
For families with significant assets, this planning is crucial, as waiting until the end of life may be too late to mitigate the potential tax burden.
Furthermore, the idea of “deathbed gifting” has emerged as a potential strategy to reduce inheritance tax. This practice involves making gifts in the final stages of life to reduce the estate’s taxable value. While this approach carries its own set of risks and considerations, it highlights the lengths to which individuals may need to go in order to minimize the tax burden.
