IHT is increasingly a tax for all, not just the wealthy

• For a 45-year-old earning the national average of £35,000, the projected IHT bill at age 68 is £194,529
• The figure rises to £218,992 and £267,914 for those with a salary of £50,000 and £80,000, respectively
• This is because of potential growth in pension and property prices and plans to include pensions in IHT calculations from April 2027 and the ongoing freeze of the main nil-rate band
• A Freedom of Information (FOI) request by interactive investor to the OBR revealed that nearly 153,000 estates could face new or increased IHT liability by 2030 as a result – including 31,200 additional estates that will become liable for IHT
• A recent interactive investor survey* found that more than half (54%) of UK adults plan to adjust their retirement or estate planning in response to the IHT changes on pensions. 

The ‘double whammy’ of plans to include pensions in inheritance tax (IHT) calculations, alongside the ongoing freeze in nil-rate bands, means that even the estate of a low earner could face IHT at retirement, according to new calculations by interactive investor.

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A 45-year-old earning £20,000 annually, owning a home valued at the national average of £268,319 (based on Land Registry figures) and with £80,000 in their pension (the average for their age according to ONS data), would face an estimated IHT liability of £170,069 by the time they reach state pension age, set to rise to 68 between April 2044 and April 2046.

This estimate assumes pension contributions of 8% of salary (the minimum for automatic enrolment) and a 2% annual increase in property value and wages, which would also boost pension contributions over time. It also assumes that the £325,000 nil-rate band is available on their death. 

For a 45-year-old earning the national average of £35,000, the projected IHT liability at age 68 is £194,529, rising to £218,992 and £267,914 for those with a salary of £50,000 and £80,000, respectively.

In the October Budget, the chancellor announced plans to include unused pension savings and certain pension death benefits in the value of estates for IHT purposes from 6 April 2027. This change, combined with the ongoing freeze of the main nil-rate band (frozen at £325,000 since April 2009) and the residence nil-rate band (set at £175,000 since April 2020), means more estates will become liable for IHT.

A Freedom of Information (FOI) request by interactive investor to the Office for Budget Responsibility (OBR) revealed that nearly 153,000 estates could face new or increased IHT liability by 2030 as a result – including 31,200 additional estates that will become liable for IHT.

Source: interactive investor. Assumptions: 45-year-old with £80,000 in their pension (the average for their age according to ONS figures), contributing 8% of salary until age 68. They own an average-priced house (based on current Land Registry figures) appreciating at 2% per year. It also assumes that the £325,000 nil-rate band is available on their death.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The double whammy of plans to include pensions in IHT calculations, alongside the ongoing freeze in nil-rate bands, means that IHT is increasingly becoming a tax for all, not just the wealthy as it was originally portrayed. The stark reality is that the IHT net is expanding, increasingly ensnaring people with modest assets.

“The evolving IHT regime continues to be a major revenue stream for the government, with IHT receipts reaching record highs between April 2024 and March 2025, and likely to keep rising.

“Understanding the key changes to the IHT regime is vital for anyone looking to pass on wealth efficiently. A recent interactive investor survey* found that more than half (54%) of UK adults plan to adjust their retirement or estate planning in response to the IHT changes on pensions. Whether this means gifting more to loved ones or exploring other strategies, it’s crucial not to overlook your own financial needs in later life – you don’t want to find yourself financially stretched in retirement.”

Recent analysis by interactive investor shows how making regular gifts using IHT gifting exemptions – rather than a one-off lump sum – could save families up to £37,000 in tax. Full details are available here.

Rising IHT burden by 2030

• According to the FOI to the OBR, 31,200 additional estates will become liable for IHT by the end of the 2029-30 tax year if the proposed changes are implemented, with a further 121,500 estates facing increased IHT liability
• The proportion of estates subject to IHT is projected to rise from 5.2% in 2023-24 to 9.5% in 2029-30, while the average tax bill per estate is expected to remain broadly unchanged
• In the 2027-28 tax year, the average IHT liability is projected to be £169,000 – increasing by approximately £34,000 when pension assets are included in the value of the estate, according to OBR estimates.

*The survey was conducted among 1,064 visitors to the interactive investor website between 6 and 7 February 2025.