Rachel Reeves, the Labour Party Chancellor, is preparing to introduce sweeping changes to inheritance tax (IHT) rules, which could result in grieving families facing a financial hit of up to £82,000.
The changes are aimed at increasing government revenue but are being met with widespread concern over their impact on average homeowners and families.
Impact on Average Homeowners
Under the new proposal, a working-age single homeowner in England—owning a home valued at the national average of £290,395 and holding a pension pot worth £415,000—could see an inheritance tax bill of approximately £82,158.
Key Details
| Criteria | Amount/Impact |
|---|---|
| Average Home Price (England) | £290,395 |
| Average Pension Pot | £415,000 |
| Estimated IHT Bill | £82,158 |
| New Tax Implementation Date | April 2027 |
| Potential IHT Rate | Up to 40% |
| Projected Increase in Estates Paying IHT | From 4% to 9.7% |
End of Pension Pot Exemption
A major element of the proposed policy is the removal of inheritance tax exemptions on pension pots starting in April 2027.
This change means that pension savings will now be taxed at up to 40%, a shift expected to almost double the number of estates liable for IHT—from 4% currently to nearly 9.7%.
Restrictions on Tax-Free Gifting
Ms Reeves is also exploring limits on tax-free gifts to children. Currently, families can give away unlimited gifts tax-free under specific conditions.
However, the new measures may introduce caps on such gifts, which could significantly alter family financial planning.
Expert Concerns
- Jon Greer, Quilter’s head of retirement policy, warned that families—especially cohabiting couples—might be disproportionately affected, as they do not benefit from the same exemptions as married couples.
- Rachael Griffin, tax expert at Quilter, added that the changes could impact both large and modest regular support given by retirees to younger family members, such as help with education or living costs.
Risks to Financial Stability
Financial experts caution that if the inheritance tax reforms are implemented without a gradual phase-in, families may suffer a sudden financial burden. Greer highlighted the risk of this burden causing long-term financial instability for households, particularly during the emotionally difficult time following the loss of a loved one.
Griffin emphasized that retirees typically gift around £2,500 annually to loved ones. The proposed changes could make even these routine support payments subject to taxation, unless well-defined thresholds and exemptions are put in place.
Rachel Reeves’ proposed inheritance tax reforms could have a profound impact on families across the UK. With pension pots set to lose their IHT-exempt status and tax-free gifting possibly limited, average homeowners could face steep bills—particularly those who are not legally married.
Financial advisors are urging the government to proceed carefully, with phased rollouts and clear exemptions, to avoid unintended hardship on already grieving families.
FAQs
The changes, including the end of pension pot exemptions, are expected to begin in April 2027.
A homeowner with an average-value home and a £415,000 pension pot could face an inheritance tax bill of £82,158.
No. Married couples are typically better protected due to inheritance tax allowances, while cohabitees may face larger tax liabilities.
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