Homeowners in England may be hit with an Inheritance Tax bill of £82,158 starting in 2027 due to recent Budget changes, as per HMRC. Quilter’s analysis reveals that the average liability for an individual with a home valued at £290,395 and a moderate pension pot of £415,000 could be substantial.
HMRC has officially stated that beginning April 2027, pension savings will be included in the estate of deceased individuals, potentially subjecting retirement funds to Inheritance Tax. Currently, if a pension is inherited from someone who passed away before the age of 75, no tax is levied. However, if the individual dies after 75, Income Tax is applicable when accessing the inherited pension as income.
Quilter’s latest data indicates that cohabiting families with young children, devoid of certain Inheritance Tax exemptions due to unmarried status, are at heightened risk. Inheritance Tax triggers when an estate surpasses £325,000, with a standard 40% rate applied on the excess value.
Nevertheless, there are exceptions such as no Inheritance Tax when leaving the estate to a spouse or civil partner. Transferring a home to children or grandchildren can raise the threshold to £500,000, combining the basic £325,000 allowance with an additional £175,000. Unused Inheritance Tax allowances within a marriage or civil partnership can be transferred upon death, potentially allowing a couple to pass on up to £1 million tax-free.
Despite joint property ownership reducing estate value, Quilter warns that even with shared ownership, families in England could still face an Inheritance Tax bill of £24,079 due to pension inclusion. In cases of sole property ownership, the bill increases significantly.
For instance, in London, owning an average-priced home alone along with a £415,000 pension might result in a hefty Inheritance Tax bill of £192,254 by 2027. Joint property ownership can lessen the burden to £129,127 but remains a significant financial blow to non-married couples.
In Wales, Scotland, and Northern Ireland, where lower property values previously exempted families with similar pensions from Inheritance Tax, joint ownership cases could now incur bills of £23,891, £21,392, and £20,007 respectively. These liabilities may escalate if house prices surge before the new rules take effect.
Jon Greer, head of retirement policy at Quilter, expressed concern over the impact of the new tax policy on cohabiting families, emphasizing the lack of protections and relief compared to married couples. Greer urges policymakers to consider adjustments to prevent substantial financial burdens on families, particularly in cases involving young children, to avoid exacerbating the emotional distress of bereavement with financial difficulties.