house prices<\/a>, savings and pensions have continued to grow.<\/p>\nThe 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.<\/p>\n
According to chartered accountants HaysMac, if the nil-rate band had tracked inflation it would rise to over \u00a3500,000 by 2029\/20 \u2013 something often referred to as \u201cfiscal drag\u201d.<\/p>\n
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 \u00a3175,000. Like the main nil-rate band, this has not increased since it was introduced in 2017.<\/p>\n
More significantly, from 6 April, 2027, the Government will bring previously exempt pension pots and death benefits into the calculation of a person\u2019s estate for IHT purposes.<\/p>\n
Taken together, these changes create a \u201cstealth tax rise\u201d \u2013 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.<\/p>\n
How many people pay the tax<\/p>\n
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.<\/p>\n
But this number will double by 2031 as a result of Rachel Reeves\u2019s stealth raid, figures released by the Office for Budget Responsibility (OBR) show.<\/p>\n
By the start of the next decade, 9.3 per cent of all deaths will be caught by the tax.<\/p>\n
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.<\/p>\n
This is forecast to further increase to 54,300 in 2028\/29, 58,100 in 2029\/30 before reaching 63,100 in 2030\/31.<\/p>\n
But, as more lower-income families are dragged into paying the tax, the average bill due to HMRC is set to fall from \u00a3233,200 this year to \u00a3186,800 in 2030\/31.<\/p>\n
Families who may be blindsided \u2013 and by how much<\/p>\n
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) \u2013 up to 2031.<\/p>\n
The calculations then compare the IHT position under today\u2019s rules where pensions do not count towards the taxable estate with the system expected from April 2027, when pensions will be included for IHT.<\/p>\n
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 \u00a32m, the residence nil-rate band tapers away at \u00a31 for every \u00a32 above the threshold. Any amount above the remaining allowances is taxed at 40 per cent.<\/p>\n
The results show how even \u201cmoderate\u201d households could slip into IHT. Here are some examples:<\/p>\n
Comfortable homeowners: A married couple with a \u00a3650,000 home, \u00a3400,000 in pensions, and \u00a3100,000 in savings would currently be IHT-free. But, if both die in 2031 under the growth assumptions, they could face about \u00a3159,333 in IHT.<\/p>\n
A single homeowner with modest wealth: A \u00a3400,000 home, \u00a3300,000 pension and \u00a350,000 savings \u2013 today, IHT liability is around \u00a36,551. By 2031, that bill might balloon to roughly \u00a3167,138.<\/p>\n
A mortgage-free couple in London\/South East: Home worth \u00a31.1m, \u00a3500,000 pensions and \u00a3100,000 savings \u2013 are already facing an IHT bill of \u00a3148,871. By 2031, that could surge to \u00a3433,032 thanks to asset growth and tapering of residence nil\u2011rate band.<\/p>\n
A single pensioner saver with modest home: A \u00a3350,000 home, \u00a3600,000 pension and \u00a375,000 savings \u2013 no IHT today. But by 2031, they could owe some \u00a3317,860 in IHT.<\/p>\n
These are not outlier \u201cmega-estates\u201d, rather, middle-class households quietly accumulating pensions, savings and property, Shaun Moore, tax and financial planning expert at Quilter, said.<\/p>\n
\u201cThe 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.<\/p>\n
\u201cHouseholds who once thought they were comfortably below the limit could face significant tax bills if they do nothing.\u201d<\/p>\n
In the example of the married couple above, Moore noted: \u201cWhile their total wealth is \u00a31,150,000, pension wealth currently sits outside their estate, leaving a taxable estate of \u00a3750,000 \u2013 comfortably under their combined nil rate bands.\u201d<\/p>\n
But fast forward to 2031, and their taxable estate could reach around \u00a31,398,000, which is \u201croughly \u00a3400,000 over the thresholds, resulting in an IHT bill of nearly \u00a3160,000.\u201d<\/p>\n
Why this is more than just for the super-rich<\/p>\n
This shift means IHT is no longer a niche issue affecting only the ultra-wealthy.<\/p>\n
As Moore argued: \u201cThe combination of frozen thresholds and pension inclusion means that IHT is no longer just a concern for the very wealthy.<\/p>\n
\u201cIt\u2019s becoming a mainstream issue for middle-class families, particularly homeowners and diligent savers.\u201d<\/p>\n
The interplay between rising asset values and static allowances means many households who regard themselves as \u201ccomfortable but not rich\u201d could be in for a shock.<\/p>\n
With property values<\/a> still rising in many parts of the UK, and pensions steadily growing thanks to contributions and investment returns, the \u201cmiddle-class IHT time bomb\u201d appears increasingly real, he said.<\/p>\nMoore advised families who want to protect their legacy to act sooner rather than later.<\/p>\n
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.<\/p>\n
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.<\/p>\n","protected":false},"excerpt":{"rendered":"Experts warn the combination of frozen thresholds and pension inclusion means that IHT is no longer just a…\n","protected":false},"author":2,"featured_media":327528,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[64,63,1480,99,186,36756,1794,184,185,4961],"class_list":["post-327527","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-au","tag-australia","tag-budget","tag-business","tag-finance","tag-inheritance-tax","tag-pension","tag-personal-finance","tag-personalfinance","tag-tax"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/327527","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=327527"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/327527\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/327528"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=327527"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=327527"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=327527"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}