Taxing times

Britain’s most disliked tax looks set to hit more families.

It was forty years ago when Inheritance Tax (IHT) was introduced by then chancellor Nigel Lawson. Opposition MP Roy Jenkins famously described the new tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

It’s not quite the context in which Jenkins made his comment, but it is fair to say that IHT is a tax on inertia; a tax on not wanting to talk about it. It’s a tax that many people choose to pay. It’s also often described as Britain’s “most hated” tax, despite it contributing less than 1% of the government’s revenue¹.

Understandably, death isn’t a favourite topic of conversation, especially when it comes to discussing our own mortality. But not facing up to the potential impact of IHT on your wealth can prove a very costly mistake.

IHT receipts reached a record £8.5 billion in the year to March 2026. The average IHT bill now stands at £212,000².

The IHT tax-free threshold (or nil rate band) of £325,000 has been frozen since 2009 and will remain at that level until at least April 2031. That’s the longest period without an increase in the history of UK death taxes. If the threshold had kept pace with inflation, it would be around £525,000 today³.

This is the main reason why so many more ordinary homeowning families are being dragged into paying a tax that was originally designed for the very wealthy.

However, changes to the taxation of pensions on death, announced in the 2024 Budget and set to take effect from April 2027, could significantly increase IHT bills and punish families even more.

The 67% pension tax trap

Pensions have long been regarded as a safe and tax-efficient way to pass on wealth, as unused pension pots have traditionally remained outside of the IHT net.

But after April 2027, unused pension pots for those who die over age 75 will be subject to 40% IHT and up to 45% Income Tax when beneficiaries withdraw the funds. This creates a combined effective tax rate of up to 67%.

 Example:

·       Pension pot at death: £100,000

·       IHT (@ 40%): £40,000

·       Remaining value: £60,000

·       Income Tax on withdrawal (up to 45%): £27,000

·       Net to beneficiaries: £33,000

Your family receives just £33,000 and £67,000 goes to HMRC.

This change could have major implications for estate planning. It’s just one more reason why it’s important to understand what impact IHT could have on your family.

You still have a choice between passing your wealth onto your loved ones or the taxman. The key is to plan early. Unless you take action, the wealth you’ve built up over a lifetime could be taxed again when you die. But by discussing your wishes and putting the right estate planning in place, you can keep your legacy intact and help secure your family’s financial future.

The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

For specialist tax advice, please refer to an accountant or tax specialist.

¹ Office for Budget Responsibility, February 2026

² GOV.UK, April 2026

³ House of Commons Library, April 2026

Approved by The Openwork Partnership on 02/06/2026

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