The upcoming overhaul of inheritance tax (IHT) rules, set to take effect from April 2027, is poised to have a significant impact on an estimated additional 10,500 estates, according to HMRC projections. The key change involves including unspent pension pots in IHT calculations, resulting in higher tax bills for some households.
The current system levies IHT at 40% on the portion of an estate exceeding £325,000 (the primary nil-rate band) and a further £175,000 (residence nil-rate band), which is specific to parents leaving a home to direct descendants from a married relationship. This combined allowance allows individuals to pass on up to £500,000 tax-free. For married couples or those in civil partnerships, unused allowances can be transferred to the surviving partner, potentially enabling them to pass on up to £1 million without IHT.
However, analysis by Interactive Investor reveals how this system creates disparities for unmarried partners and blended families. For instance, an individual inheriting £600,000 from an unmarried partner in April 2027 could face an IHT bill of £110,000, whereas under previous rules, no tax would have been payable. This is because unmarried partners can only benefit from the deceased's nil-rate band of £325,000.
According to Craig Rickman, a personal finance expert at Interactive Investor, evolving family structures may lead to more grieving family members facing substantial tax burdens. He highlighted that younger generations might be unaware that IHT payable on inherited assets can depend on their parents' marital status and the specific allowances available.
The increase in estates subject to IHT is also attributed to the freezing of tax-free allowances, with both the nil-rate band (£325,000) and residence nil-rate band frozen since April 2009. Both will remain frozen until at least 2031, resulting in a fiscal drag that, combined with rising property values and pension wealth, means more estates are surpassing IHT thresholds.
While the FTSE 100's performance is not directly impacted by these specific IHT rule changes, the broader economic context of frozen allowances and increased tax liabilities could influence consumer spending and investment decisions for those planning for intergenerational wealth transfer. As a result, UK savers and investors must understand these changes to ensure effective estate planning.