It was forty years ago when Inheritance Tax (IHT) was introduced by then chancellor Nigel Lawson. It’s also often described as Britain’s “most hated” tax, despite it contributing less than 1% of the government’s revenue¹.
Understandably, death isn’t a favourite topic of conversation, especially when it comes to discussing our own mortality. But avoiding talking about IHT can have a big impact on the wealth that you pass on to your loved ones.
While IHT is often perceived as a tax for the very wealthy, that is increasingly no longer the case. IHT receipts reached a record £8.5 billion in the year to March 2026 and the average IHT bill now stands at £212,000².
The IHT tax-free threshold (or nil rate band) of £325,000 has been frozen since 2009 and will remain at that level until at least April 2031. That’s the longest period without an increase in the history of UK death taxes. If the threshold had kept pace with inflation, it would be around £525,000 today³.
This is the main reason why so many more ordinary families are being dragged into paying a tax that was originally designed for the very wealthy.
Changes to the taxation of pensions on death, announced in the 2024 Budget and set to take effect from April 2027, could significantly increase IHT bills and affect families even more.
The 67% pension tax trap
Pensions have long been regarded as a safe and tax-efficient way to pass on wealth, as unused pension pots have traditionally remained outside of the IHT net.
But after April 2027, unused pension pots for those who die over age 75 will be subject to 40% IHT and up to 45% Income Tax when beneficiaries withdraw the funds. This creates a combined effective tax rate of up to 67%.
Example:
- Pension pot at death: £100,000
- IHT (at 40%): £40,000
- Remaining value: £60,000
- Income Tax on withdrawal (up to 45%): £27,000
- Net to beneficiaries: £33,000
Your family receives just £33,000 and £67,000 goes to HMRC.
This change could have major implications for estate planning. It’s just one more reason why it’s important to understand what impact IHT could have on your family.
There is still time to plan
The good news is that there are still opportunities to review your plans and make changes where needed.
Whether you're thinking about gifting, reviewing your estate plans or understanding how pension changes could affect your family, your Financial Adviser can help you explore the options available.
For specialist tax advice, please refer to an accountant or tax specialist.
¹ Office for Budget Responsibility, February 2026
² GOV.UK, April 2026
³ House of Commons Library, April 2026
THE VALUE OF INVESTMENTS AND ANY INCOME FROM THEM CAN FALL AS WELL AS RISE AND YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
HM REVENUE AND CUSTOMS PRACTICE AND THE LAW RELATING TO TAXATION ARE COMPLEX AND SUBJECT TO INDIVIDUAL CIRCUMSTANCES AND CHANGES WHICH CANNOT BE FORESEEN.
ASPECTS OF INHERITANCE TAX PLANNING ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY NOR THE PRUDENTIAL REGULATION AUTHORITY.
WILL WRITING AND TRUSTS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY NOR THE PRUDENTIAL REGULATION AUTHORITY.
Newcastle Building Society introduces to Newcastle Financial Advisers Limited for advice on investments, pensions, life and protection insurance, and inheritance tax planning. Aspects of inheritance tax planning are not regulated by the Prudential Regulation Authority nor the Financial Conduct Authority. Newcastle Financial Advisers is a trade name of Newcastle Financial Advisers Limited which is an appointed representative of The Openwork Partnership a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
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