Homeowners in England face an Inheritance Tax bill from HMRC of £82,158 from 2027 following changes announced in the Budget.
Quilter has calculated the average liability for someone with an average-priced home (£290,395) and a moderate pension pot (£415,000).
HMRC has now confirmed that from April 2027, pension savings will count towards the estate of someone who has died, which means your retirement savings may become liable for Inheritance Tax.
At present, if you inherit a pension from someone who died before the age of 75, then there is no tax to pay. If the person dies after the age of 75, then you pay Income Tax when you draw from the inherited pension, as it will be treated as income.
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The new figures from Quilter show cohabiting families with young children, who do not benefit from various Inheritance Tax exemptions because they are not married, will be more exposed.
Inheritance Tax is due if the value of your estate is above £325,000. The standard rate is 40% on the value of the estate above this amount.
However, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner. If you give away your home to your children – this includes adopted, foster or stepchildren, or your grandchildren – then the Inheritance Tax threshold can increase to £500,000.
This includes the basic £325,000 allowance, plus an additional £175,000. If you are married or in a civil partnership, any Inheritance Tax allowance that isn’t used can be passed on when someone dies.
This means a married couple can potentially pass on as much as £1million without their estate being subject to Inheritance Tax. In many cohabiting households the property is jointly owned (joint tenants) meaning only half its value is included in the estate.
But Quilter states that even then, a typical family in England would still face an Inheritance Tax bill of £24,079 because of the pension inclusion. Where the property is solely owned by the deceased, the bill is more than three times higher.
For example, in London, sole ownership of an average-priced home (£565,637) plus a £415,000 pension creates an Inheritance Tax bill of £192,254 in 2027.
If the home is jointly owned, that falls to £129,127 – still a severe hit for a grieving family without the protections available to married couples.
Across Wales, Scotland and Northern Ireland, where lower house prices meant there was previously no liability for families with similar pensions, bills in joint-ownership cases will still be £23,891, £21,392 and £20,007 respectively. These liabilities will grow if house prices inflate before the rules take effect.
Jon Greer, head of retirement policy at Quilter, said: “Charging inheritance tax on a pension someone could not access and will never be able to use due to passing away before the minimum pension age is optically terrible for the Government.
“It is even more unjust for cohabiting families who have no spousal relief or ability to transfer tax allowances. A grieving family with young children and an average-priced home could face six-figure inheritance tax bills at the most distressing time.
“Married couples are protected by exemptions and allowances – cohabitees aren’t. Policymakers should consider carve-outs or transitional reliefs for working-age deaths, particularly when young children are involved.
“Without change, this policy risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family’s future despite raking in very little in additional revenue.”
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