The households that could be dragged into paying inheritance tax after Budget

Experts warn the combination of frozen thresholds and pension inclusion means that IHT is no longer just a concern for the very wealthy

In the wake of last week’s Budget, families that once felt assured their wealth was safe from the taxman may soon find themselves dragged into the inheritance tax (IHT) net.

Thanks to a combination of frozen thresholds, rising asset values and the forthcoming inclusion of pension pots in estates, the tax – often dubbed Britain’s “most hated” – is quietly becoming a mainstream concern.

We take a look at the households most at risk and why growing property, savings and pension wealth could catch out those who thought they were comfortably below the limit.

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What’s changed

Under the new rules confirmed in the Budget, the nil‑rate band of £325,000 and the residence nil‑rate band of £175,000 will remain frozen until at least 5 April 2031 – a move expected to raise a record £14.5bn.

That means that the amount a person can leave tax-free hasn’t budged since 2009, even though house prices, savings and pensions have continued to grow.

The nil-rate band is the threshold up to which an estate is not subject to IHT. Any part of the estate above this threshold is generally taxed at 40 per cent.

According to chartered accountants HaysMac, if the nil-rate band had tracked inflation it would rise to over £500,000 by 2029/20 – something often referred to as “fiscal drag”.

In addition to the standard nil-rate band, the residence nil-rate band applies when a home is left to direct descendants and is currently set at £175,000. Like the main nil-rate band, this has not increased since it was introduced in 2017.

More significantly, from 6 April, 2027, the Government will bring previously exempt pension pots and death benefits into the calculation of a person’s estate for IHT purposes.

Taken together, these changes create a “stealth tax rise” – as asset values grow with time, more and more estates will exceed the unchanged thresholds, meaning more middle-class families will face large IHT bills.

How many people pay the tax

The latest figures show that in the 2022/23 tax year, there were 31,500 taxpaying IHT estates in the UK. This means that IHT was charged on approximately 4.62 per cent of all UK deaths in that period.

But this number will double by 2031 as a result of Rachel Reeves’s stealth raid, figures released by the Office for Budget Responsibility (OBR) show.

By the start of the next decade, 9.3 per cent of all deaths will be caught by the tax.

Modelling by the OBR showed the decision to freeze thresholds is set to increase the number of deaths subject to IHT from 35,900 in 2026/27 to 50,500 in 2027/28.

This is forecast to further increase to 54,300 in 2028/29, 58,100 in 2029/30 before reaching 63,100 in 2030/31.

But, as more lower-income families are dragged into paying the tax, the average bill due to HMRC is set to fall from £233,200 this year to £186,800 in 2030/31.

Families who may be blindsided – and by how much

Quilter, a major wealth management firm, ran a series of illustrative scenarios based on assumed annual growth in property (2.5 per cent), savings (5 per cent) and pensions (6 per cent) – up to 2031.

The calculations then compare the IHT position under today’s rules where pensions do not count towards the taxable estate with the system expected from April 2027, when pensions will be included for IHT.

The nil-rate band and the residence nil-rate band are assumed to stay frozen as per the recent Budget announcement. Where an estate exceeds £2m, the residence nil-rate band tapers away at £1 for every £2 above the threshold. Any amount above the remaining allowances is taxed at 40 per cent.

The results show how even “moderate” households could slip into IHT. Here are some examples:

Comfortable homeowners: A married couple with a £650,000 home, £400,000 in pensions, and £100,000 in savings would currently be IHT-free. But, if both die in 2031 under the growth assumptions, they could face about £159,333 in IHT.

A single homeowner with modest wealth: A £400,000 home, £300,000 pension and £50,000 savings – today, IHT liability is around £6,551. By 2031, that bill might balloon to roughly £167,138.

A mortgage-free couple in London/South East: Home worth £1.1m, £500,000 pensions and £100,000 savings – are already facing an IHT bill of £148,871. By 2031, that could surge to £433,032 thanks to asset growth and tapering of residence nil‑rate band.

A single pensioner saver with modest home: A £350,000 home, £600,000 pension and £75,000 savings – no IHT today. But by 2031, they could owe some £317,860 in IHT.

These are not outlier “mega-estates”, rather, middle-class households quietly accumulating pensions, savings and property, Shaun Moore, tax and financial planning expert at Quilter, said.

“The IHT landscape has been quietly reshaped for thousands of families. By freezing the nil-rate band and residence nil-rate band until 2030/31, as well as bringing pensions into scope for IHT from April 2027, a huge number of families will be taxed by stealth.

“Households who once thought they were comfortably below the limit could face significant tax bills if they do nothing.”

In the example of the married couple above, Moore noted: “While their total wealth is £1,150,000, pension wealth currently sits outside their estate, leaving a taxable estate of £750,000 – comfortably under their combined nil rate bands.”

But fast forward to 2031, and their taxable estate could reach around £1,398,000, which is “roughly £400,000 over the thresholds, resulting in an IHT bill of nearly £160,000.”

Why this is more than just for the super-rich

This shift means IHT is no longer a niche issue affecting only the ultra-wealthy.

As Moore argued: “The combination of frozen thresholds and pension inclusion means that IHT is no longer just a concern for the very wealthy.

“It’s becoming a mainstream issue for middle-class families, particularly homeowners and diligent savers.”

The interplay between rising asset values and static allowances means many households who regard themselves as “comfortable but not rich” could be in for a shock.

With property values still rising in many parts of the UK, and pensions steadily growing thanks to contributions and investment returns, the “middle-class IHT time bomb” appears increasingly real, he said.

Moore advised families who want to protect their legacy to act sooner rather than later.

Gifting while alive, reviewing wills and rethinking the structure of savings and pensions could make the difference between a modest legacy and a hefty tax bill, he said.

Many experts suggest gifting as a key strategy for mitigating IHT. As thresholds are frozen and asset values increase, more clients will benefit from making use of annual and lifetime gifting exemptions to reduce the value of their taxable estate.