Households Face Inheritance Tax Bills Up to £129,000 by 2027

Households in certain regions of England may soon see significant increases in their Inheritance Tax bills due to a new tax on pensions set to take effect on April 6, 2027. This change will introduce pension pots into the Inheritance Tax calculation for the first time, potentially impacting estates with average tax bills ranging from £54,000 to £129,000.

Currently, workplace pensions are exempt from Inheritance Tax, allowing individuals to pass these assets on without incurring additional taxes upon death. However, under the new rules, unspent pension funds will be added to the total value of an estate, which includes cash, investments, and property. Any value exceeding the Inheritance Tax threshold will be taxed at a rate of 40%.

The impact of this change will vary significantly across the country. In regions where property values are higher, such as London and the South East, households will be more likely to exceed the tax threshold. The current nil rate band, which allows individuals to leave £325,000 free of tax, increases to £500,000 if a property is included.

As of April 2025, the average property price in London is approximately £567,000, while in the South East, it stands at £380,000. In contrast, the North East has a significantly lower average property price of just £156,000. The average pension pot, according to PensionsAge, is valued at £257,701.

For example, a household in London with an average property and pension would see their total estate valued at £824,000. This amount exceeds the Inheritance Tax threshold by £324,000, resulting in a tax bill of approximately £129,600. Previously, this estate would have incurred a tax of £26,800, marking an increase of over £100,000 due to the pension inclusion.

In the South East, the total estate value combining a property worth £380,000 and a pension of £257,701 would lead to a taxable amount of £137,000, resulting in a tax liability of around £54,800. Conversely, in the North East, the total estate value of £413,701 would remain below the threshold, resulting in no tax due.

Couples may find a way to mitigate these taxes through strategic estate planning. Married couples can combine their allowances, which could allow for larger estates to be passed on without incurring Inheritance Tax. For instance, if a husband with a property valued at £567,000 and a pension of £257,701 passes away, his wife can inherit his tax allowance, potentially allowing for a tax-free transfer to their children.

Finance firm Royal London emphasizes the implications of these changes, stating that currently, defined contribution pensions are generally not part of an estate for tax purposes. They highlight that from April 2027, this exemption will be lifted, and estates will be taxed at the standard rate of 40%.

While the firm acknowledges that these changes may affect some estates, they also point out that a significant portion of individuals do not have substantial pension savings left at the time of death. Government estimates indicate that around 10,500 estates will face Inheritance Tax for the first time as a direct result of these new regulations, and approximately 38,500 estates will pay increased taxes.

As households prepare for these forthcoming changes, it is crucial for individuals to understand the new tax implications on their pensions and estate planning. With property values differing considerably across England, the financial impact of this policy change will vary, particularly affecting those in higher-value areas.