Chancellor of the Exchequer, Rachel Reeves has just announced a change in inheritance tax (IHT) and this is set to affect many ordinary homeowners, not just the wealthy.
One key change is that pension pots—once exempt from inheritance tax—will now be counted as part of an estate from April 2027. This shift is expected to nearly double the number of estates liable for IHT, rising from around 4 per cent to nearly 10 per cent.
For a single homeowner with an average property and a modest pension of around £415,000, the tax bill could be approximately £82,000, and in high-value areas like London, it might jump to over £190,000.
These reforms especially disadvantage unmarried couples, who cannot transfer allowances in the same way that married couples or civil partners can.
At the same time, tax-free thresholds remain frozen while property values climb. In 2022–23, inheritance tax receipts in London amounted to £1.53 billion—three times more than those from Scotland, Wales, and Northern Ireland combined.
The average IHT bill in London reached around £300,000, significantly higher than the UK average of £213,000. Overall, IHT revenue surged to £6.7 billion, and it is projected to hit £9.1 billion in 2025–26 and could climb to £14 billion by 2029–30.
Current inheritance tax bands
Currently, individuals in the UK benefit from a nil-rate band of £325,000, meaning no inheritance tax is due on estate values up to that amount.
An additional residence nil-rate band of £175,000 applies when a home is passed on to direct descendants—so a sole homeowner can potentially leave up to £500,000 tax-free.
For married couples or civil partners, these allowances can be combined, allowing up to £1 million to be passed on without IHT. However, the residence allowance is tapered away for estates valued above £2 million. On amounts above these thresholds, the standard tax rate is 40%, which can be reduced to 36% if at least 10% of the estate is left to charity.
These rules are currently frozen and set to remain in force until at least April 2030. Taken together, these developments mean more grieving families could face unexpectedly large tax bills, drawn into the tax net by rising house prices and the new inclusion of pensions. Married couples still benefit from shared allowances, but many others may struggle to meet these costs at a difficult time.
Steve Gauke, CEO of Provira commented: “As an inheritance advance provider, we offer an effective way to release capital from your inheritance whilst it is still in probate. If the amount of tax you owe is higher than expected and or funds are tied up in the estate or property, we are pleased to offer a viable option where households can release up to 50% of their inheritance owed to them ahead of time.”