Homeowners in England are expected to face an Inheritance Tax bill of £82,158 starting in 2027 due to changes announced in the recent Budget. Quilter has determined that the average liability for individuals owning a home valued at £290,395 and holding a moderate pension pot of £415,000 will be impacted.
HMRC has verified that as of April 2027, pension savings will be included in the estate of deceased individuals, potentially subjecting retirement savings to Inheritance Tax. Currently, inheriting a pension from someone who passed away before age 75 incurs no tax, while if the deceased was over 75, Income Tax is payable upon drawing from the inherited pension as it is considered income.
Quilter’s latest findings highlight that cohabiting families with young children, who lack certain Inheritance Tax exemptions available to married couples, will be particularly vulnerable to the changes. Inheritance Tax applies when the estate value exceeds £325,000, with a standard 40% rate on the surplus amount.
Exceptions include no Inheritance Tax when leaving the estate to a spouse or civil partner, and transferring a home to children or grandchildren can raise the threshold to £500,000. Unused Inheritance Tax allowance can be transferred in the event of a spouse’s death, potentially allowing a married couple to pass on up to £1 million free of Inheritance Tax.
Despite joint property ownership potentially reducing the taxable estate, Quilter warns that a typical family in England could still face a significant Inheritance Tax bill of £24,079 due to the pension inclusion. In instances of sole property ownership, the bill could be more than triple the amount.
For instance, in London, sole ownership of an average-priced home alongside a £415,000 pension could result in an Inheritance Tax bill of £192,254 in 2027. In joint ownership scenarios, the bill may reduce but remain substantial, posing a financial challenge for grieving families without spousal protections.
In regions like Wales, Scotland, and Northern Ireland where lower house prices historically led to no liabilities for families with similar pensions, joint ownership cases could still incur significant bills. Jon Greer, head of retirement policy at Quilter, expressed concerns over the impact on cohabiting families, emphasizing the need for policy adjustments to mitigate the financial strain on bereaved families, especially those with young children.
