The Inheritance Tax Trap: Britain's Unpopular Levy Expands Its Reach
In a controversial move, the UK government has extended the freeze on inheritance tax (IHT), a decision that will impact tens of thousands of grieving families and spark debate among the public. The Office for Budget Responsibility (OBR) predicts that by 2030-31, the number of estates affected by IHT will almost double, reaching a staggering 63,100. This is a far cry from the current figure of around 32,200.
But here's where it gets controversial: the government's decision, coupled with an upcoming rule change in 2027, means even those with modest savings and assets will find themselves caught in the IHT net. Critics argue that this stealth increase in IHT is an unfair burden on those who have worked hard and saved throughout their lives.
Richard Fuller, the Tory shadow chief secretary to the Treasury, criticized the move, stating, "Labour is not only targeting working people but now those who have saved diligently throughout their lives. The extension of the IHT freeze and the upcoming rule change will almost double the number of estates paying this tax. It's clear that the current government is out of touch with the realities of saving and investing."
The OBR's forecast highlights the impact of the IHT freeze, which has been in place since 2009. As a result, the IHT nil-rate band, originally set at £325,000, has remained unchanged, despite rising inflation. If it had kept pace with inflation, it would stand at approximately £525,000 today. This means that the value of assets and property has outpaced the tax-free allowance, leaving more families vulnerable to IHT.
Homeowners leaving their property to their children or grandchildren also benefit from the residence nil-rate band, which allows couples to pass on up to £1 million tax-free. However, with house prices and asset values rising sharply over the years, even more families will breach these limits, facing a 40% charge on anything above the allowances.
And this is the part most people miss: from April 2027, the government will include defined-contribution pension pots within an individual's estate for IHT purposes. Currently, pensions are generally free from IHT, but this rule change will subject pension savings to IHT, creating a risk of double taxation for those who die after the age of 75.
Rachael Griffin, a wealth manager at Quilter, emphasizes the unpopularity of IHT, stating, "Inheritance tax is a tax that has long been despised by the British public. What was once a tax reserved for the wealthiest families will now impact those with relatively modest estates, thanks to a decade of frozen thresholds and rising house prices."
As more middle-income households are drawn into the IHT net, the average bill per estate is expected to decrease, according to the OBR. This decrease, however, is a result of the expanding pool of taxpayers, not a reduction in the tax burden.
Financial planners advise families to utilize allowances to reduce future IHT bills. Everyone can gift £3,000 a year tax-free, along with unlimited smaller gifts of £250. Spouses can transfer assets freely, and it's recommended to consider these options to minimize the impact of IHT.
There was some relief for farmers and business owners, as the government confirmed that the new £1 million agricultural and business relief caps, introduced last year, will now be transferable between spouses, even if the first death occurred before April 6, 2026.
The extension of the IHT freeze and the upcoming rule changes highlight the need for families to take proactive steps to protect their assets and ensure their loved ones benefit from their hard-earned wealth. With the government's focus on expanding the taxpayer base, it's crucial for individuals to stay informed and plan accordingly.
What are your thoughts on the government's approach to inheritance tax? Do you think the freeze and rule changes are fair, or do they burden those who have worked hard to save and invest? Share your opinions in the comments below!
