Inheritance tax warning to 153,000 Brits with ‘modest’ assets who may face ‘new liability’

If measures to include pensions taxable estates come into effect, nearly 153,000 estates would be subject to or face additional IHT.

In her maiden Budget in October, Chancellor announced plans to include unused pension funds and death benefits from pensions in the valuation of a member’s estate for IHT purposes, starting from April 2027.

A new Freedom of Information (FOI) request by showed thousands more “modest” estates could be dragged into the tax bracket if this goes to plan.

The data gathered from the Office for Budget Responsibility (OBR) showed that an additional 31,200 estates will become liable for IHT from 2027 until the end of 2030, while 121,500 estates will face an increased IHT liability.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Including pensions in inheritance tax calculations would mark a seismic shift, particularly for those who have meticulously crafted estate plans around the current rules.

“Pensions have long been considered a tax-efficient vehicle for passing on wealth, with many relying on their flexibility and exemptions as part of their broader estate strategy. This change would force many to rethink their plans entirely, potentially accelerating drawdowns during their lifetime to reduce tax exposure.”

He added: “It could also undermine the incentive to save into pensions, disrupting long-term financial security for future generations.”

It is possible to pass on £325,000 without paying IHT (the nil-rate band, or NRB). This allowance can be increased by an additional £175,000 if you pass a family home to direct descendants (the residence nil-rate band, or RNRB). These allowances will remain frozen at their current levels until 2030.

After April 2027, if the total value of your estate, including any remaining pensions, exceeds the nil-rate band (and the residence nil-rate band if passing on a family home to children or grandchildren), IHT will likely become payable.

For those who die aged 75 or older, any pensions inherited by beneficiaries will also be subject to income tax at the beneficiary’s marginal rate. This will apply after deducting IHT, as beneficiaries withdraw income or lump sums from the inherited pension.

As a result, inherited pensions could be subject to “double taxation”. This would create an effective tax rate of 52% for pension pots passed on to basic-rate taxpayers, rising to 64% and 67% for higher and additional-rate taxpayers, respectively.

The investing platform has called on the Chancellor to explore alternative measures proposed by the pensions industry as part of the consultation process.

Richard Wilson, CEO of Interactive Investor, said: “The current proposals are an affront to people who have done the right thing by diligently investing through a pension throughout their working lives to ensure financial resilience in retirement while also taking proactive steps to create an effective estate plan that complies with existing tax rules.

“They undermine the already fragile confidence in the pensions system and could drive decisions that undermine long-term financial security.”

He added: “Including pensions in inheritance tax calculations creates the prospect of double taxation, where the pension pot exceeds the IHT threshold, and the beneficiary is taxed again at their marginal income tax rate. This isn’t right, and we urge the Government to collaborate with us and the broader pensions industry to develop a simple ‘one tax’ solution.”

According to estimates from the OBR, the average IHT liability is expected to reach £169,000 in the 2027/28 tax year, increasing by approximately £34,000 when pension assets are included in the estate’s value.

These estimates do not consider potential behavioural changes following the announcement of the new measures. For example, individuals might quickly draw down pension funds or use exemptions and reliefs more effectively to reduce their estate’s overall IHT liability.

The proposed changes could result in a “new” IHT liability for estates with relatively modest assets and pension savings.

Calculations by Interactive Investor indicate that an individual with a -free property valued at £300,000—slightly above the national average of £290,000 reported by the Office for National Statistics—and a pension worth £100,000 would face an IHT liability of £30,000 from April 2027. This liability could rise to £110,000 for those with pensions valued at £300,000.

The calculations assume the full nil-rate band is available, and the additional residence nil-rate band does not apply.

Mr Jobson added: “The Government appears to be tightening the screws on inheritance tax, effectively widening the net to capture more estates.

“With thresholds such as the nil-rate band frozen for years amid rising property prices and inflation, it’s no surprise that more families – many of whom wouldn’t consider themselves wealthy – are being caught in the IHT net. The net will be bursting at the seams by the end of the decade if the latest proposals come to fruition.”