Rachel Reeves has confirmed an extension of the inheritance tax (IHT) freeze – a move that will drag tens of thousands more bereaved households into Britain’s most hated tax.
Figures from the Office for Budget Responsibility (OBR) show the share of estates liable for IHT will rise from around 5% today to 9.3% by 2030-31 – meaning the number of families paying the 40% death duty will double over the decade.
The OBR forecasts 63,100 estates will be hit by IHT in 2030-31, up from around 32,200 this year. The freeze – now extended until 2031 – is set to raise a record £14.5bn.
Critics said the decision, combined with a major rule change that will pull pension pots into IHT from April 2027, means even ‘modest’ families will be swept into the net.
Richard Fuller, the Tory shadow chief secretary to the Treasury, said: “Not content with hammering working people, Labour are now coming for those who have worked hard and saved right at the end of their lives, with a stealth increase in inheritance tax that means that the number of estates paying the tax will almost double. Reeves is clearly out of her depth.”
In fact, the Conservatives failed to raise the IHT threshold during 14 years in power. As a result, the IHT nil-rate band – the £325,000 tax-free allowance that has been unchanged since 2009 – is now frozen until at least 2031. If it had risen with inflation, it would stand at about £525,000 today.
Homeowners leaving their property to children or grandchildren also benefit from the £175,000 residence nil-rate band, giving a couple the ability to pass on up to £1m tax-free. Anything above these allowances faces a 40% charge.
But house prices and asset values have risen sharply over 15 years of frozen thresholds, meaning far more families will now breach the limits.
The residence nil-rate band, had it risen with inflation, would today be around £230,400.
From April 2027, the government will include defined-contribution pension pots within a person’s estate for IHT purposes. Currently, pensions are generally free of IHT. Beneficiaries pay income tax on inherited pensions only when the saver dies after 75.
Experts warn this creates the risk of double taxation – with pension withdrawals facing both income tax and IHT for those dying over 75.
Rachael Griffin, of wealth manager Quilter, said: “Inheritance tax is one of Britain’s most hated taxes.
“What was once a tax on only the wealthiest families will increasingly impact those with even relatively modest estates, who after a decade of frozen thresholds alongside rising house prices will be snagged by the tax.
“Add to that the significant changes coming in April 2027, and the government looks set to cash in on an ever-expanding pool of taxpayers.”
As more middle-income households are dragged in, the average bill per estate is forecast to fall from £233,200 this year to £186,800 by 2030-31, according to the OBR.
Ian Dyall of Evelyn Partners warned: “Wednesday’s update means another year when protection against inheritance tax will shrink in real terms.
“That should act as a warning shot for all families facing growing inheritance tax liabilities to take steps now so loved ones get to keep more of the family assets.”
Financial planners say families should consider using allowances to reduce future IHT bills. Everyone can gift £3,000 a year tax-free, plus unlimited smaller gifts of £250. Spouses can transfer assets freely.
Michelle Holgate, financial planning director at RBC Brewin Dolphin, said: “Nearly three-quarters of wealthy individuals have never made a financial gift.
“Too many people wait until death before passing on their assets when it can be far more tax-efficient to gift money while alive – and you get the bonus of seeing loved ones benefit.”
There was some relief for farmers and business owners after ministers confirmed that the new £1m agricultural and business relief caps – introduced last year – will now be transferable between spouses, including when the first death occurred before April 6, 2026.