IHT reform could hit working-age homeowners

A pension rule change could push large inheritance tax bills onto families with average priced homes and unspent pension savings.

Working-age homeowners face six-figure IHT after pension rule changes

A change to inheritance tax rules could cost families of single homeowners more than £80,000 in death duties, even if they die before reaching pension age. Quilter’s analysis focuses on England, where an average-priced home of £290,395 and a pension pot of £415,000 would face an IHT bill of about £82,158. The changes from last autumn's Budget count unspent pension savings toward an estate for IHT purposes regardless of age at death. Inheritance tax is 40% on assets above £325,000, with an extra £175,000 main residence allowance if passed to direct descendants.

The estimates show wide differences by ownership and location. A sole owner in London with the described assets could see IHT reach about £192,254 in 2027, while joint ownership reduces that to around £129,127. For the same pattern in Wales, Scotland, and Northern Ireland, joint-ownership bills are £23,891, £21,392, and £20,007 respectively. Cohabiting couples without marriage face higher exposure, including an estimated £24,079 in a typical three-region scenario. The Treasury says more than 90% of estates pay no IHT after these changes; Quilter notes the policy could raise about £1.5bn annually by 2029-30.

The policy change aims to tax wealth tied up in retirement pots, but it risks widening inequities between married couples and those who live together. Non-married households may bear heavier costs at a time of loss, and the emotional toll could be steep for families already grieving. This is not just a number game; it reshapes how people plan for the future and how they feel protected by the tax system.

Policymakers face a tough choice between maintaining pension incentives and closing gaps it creates in estate planning. Some carve-outs or transitional reliefs could soften the hit for young families, but any rewrite will require clear guidance to avoid chaos in wills and estates. The Treasury argues most estates will pay no IHT after changes, yet critics warn the policy could deepen financial stress for many households and communities.

Highlights

Policy choices here will shape families long after the funeral notices.