A change to inheritance tax (IHT) rules could cost the families of single homeowners more than £80,000 in death duties, new analysis has shown, even if they die before reaching pension age.
A working-age single homeowner in England with an average-priced home of £290,395 and a moderate pension pot of £415,000 could face an IHT bill of £82,158, according to calculations from Quilter.
This is a result of changes made by Rachel Reeves in the last autumn Budget, which means unspent pension savings will now count towards a person’s estate for IHT purposes regardless of age at death.
IHT is charged at a rate of 40 per cent on assets above the £325,000 nil-rate band, with an additional £175,000 allowance if the main residence is passed to direct descendants.
Pensions can currently be inherited tax-free if the deceased is under 75, up to £1.07m. If over 75, beneficiaries pay income tax on inherited pensions.
Reeves’s changes will impose up to 40 per cent IHT on unspent private pension pots, which is expected to raise about £1.5bn annually for the Treasury by 2029-30.
The figures analysed by Quilter assume in all circumstances that the homeowners have not touched the retirement fund they built up.
The amount of tax charged to those inheriting money from people who have already accessed their pension pots before death will be lower. This is because the pots they inherit will be smaller.
Couples who live together with children but aren’t married will also suffer under the new changes, according to Quilter, as they do not benefit from an exemption which allows married people to pool their inheritance tax allowances, potentially allowing married couples to pass £1m on to their children or grandchildren without facing a tax charge.
Many cohabiting couples jointly own their property, meaning only half its value is included in the estate, but a family of this nature could still face an IHT bill of £24,079, purely because of the pension inclusion.
Where the property is owned entirely by one person in the couple who then passes away, the bill would be more than three times higher because the estate is far bigger.
How much inheritance tax estates could have to pay
| Country and government office region | Price | Nil rate band and residence nil rate band | Current IHT | Pension | Excess Above NRBs | IHT | IHT (Joint Ownership) |
|---|---|---|---|---|---|---|---|
| England | £290,395 | £500,000 | £0.00 | £415,000 | £205,395 | £82,158 | £24,079 |
| Northern Ireland | £185,037 | £500,000 | £0.00 | £415,000 | £100,037 | £40,015 | £3,007 |
| Scotland | £191,927 | £500,000 | £0.00 | £415,000 | £106,927 | £42,771 | £4,385 |
| Wales | £209,580 | £500,000 | £0.00 | £415,000 | £124,580 | £49,832 | £7,916 |
| East Midlands | £242,052 | £500,000 | £0.00 | £415,000 | £157,052 | £62,821 | £14,410 |
| East of England | £339,747 | £500,000 | £0.00 | £415,000 | £254,747 | £101,899 | £33,949 |
| London | £565,637 | £500,000 | £26,255 | £415,000 | £480,637 | £192,255 | £79,127 |
| North East | £159,142 | £500,000 | £0.00 | £415,000 | £74,142 | £29,657 | £0 |
| North West | £209,498 | £500,000 | £0.00 | £415,000 | £124,498 | £49,799 | £7,900 |
| South East | £380,650 | £500,000 | £0.00 | £415,000 | £295,650 | £118,260 | £42,130 |
| South West | £304,237 | £500,000 | £0.00 | £415,000 | £219,237 | £87,695 | £26,847 |
| West Midlands Region | £244,262 | £500,000 | £0.00 | £415,000 | £159,262 | £63,705 | £14,852 |
| Yorkshire and The Humber | £203,836 | £500,000 | £0.00 | £415,000 | £118,836 | £47,534 | £6,767 |
For example, in London, sole ownership of an average-priced home (£565,637) plus a £415,000 pension would lead to an IHT bill of £192,254 in 2027 on death.
This is because there is £980,637 worth of assets. The person inheriting the estate benefits from £325,000 worth of tax-free inheritance, plus an extra £175,000 for their home, totalling £500,000. Some 40 per cent tax is charged on the remaining £480,637, which equals £192,254.
If the home is jointly owned, that falls to £129,127 – still a large hit for a grieving family without the protections available to married couples.
Across Wales, Scotland and Northern Ireland, where lower house prices meant there was previously no tax owed for families with similar pensions, bills in joint-ownership cases will still be £23,891, £21,392 and £20,007 respectively.
These taxes will grow if house prices inflate before the rules take effect.
Jon Greer, head of retirement policy at Quilter, said: “Charging inheritance tax on a pension someone could not access and will never be able to use due to passing away before the minimum pension age is optically terrible for the Government.
“It is even more unjust for cohabiting families who have no spousal relief or ability to transfer tax allowances. A grieving family with young children and an average-priced home could face six-figure IHT bills at the most distressing time.
“Married couples are protected by exemptions and allowances; cohabitees aren’t. Policymakers should consider carve-outs or transitional reliefs for working-age deaths, particularly when young children are involved.
“Without change, this policy risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family’s future despite raking in very little in additional revenue.”
A Treasury spokesperson said: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes.”
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