Thousands of UK families are poised to lose a critical inheritance tax allowance due to significant policy changes under a potential Labour government. By 2030-31, over 16,000 estates are projected to surpass the £2 million mark, triggering the gradual withdrawal of the £175,000 residence nil rate band.
This looming tax burden is compounded by Labour Party Chancellor Rachel Reeves’s planned reforms, which will bring pension savings into the inheritance tax net starting April 2027. This move is expected to push estates currently valued at £900,000 or more over the £2 million threshold as early as 2027-28.
Wealth manager Quilter conducted the analysis, with Shaun Moore highlighting the “double whammy” effect: estates will face inheritance tax on pensions previously exempt, alongside frozen tax allowances. Moore warns, “This tax change will increasingly impact estates, and careful planning will become essential. Pensions, once preserved during retirement, may soon be the first assets to draw upon.”
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Sean McCann of insurer NFU Mutual illustrates the growing cost: a single individual with a £2 million estate including a £500,000 pension currently faces an inheritance tax bill of £600,000—set to rise sharply to £870,000 from next April.
David Little, wealth manager at Evelyn, emphasizes the necessity of proactive planning. “To reduce inheritance tax impact, advance strategies are crucial. This includes making lifetime gifts, prudent wealth spending, and maximizing allowances. In some cases, death-bed gifting can also be a useful tool.”
With these changes on the horizon, UK families must act now to manage their inheritance tax exposure effectively.