Concerns have been raised in Parliament regarding the effects of inheritance tax on middle-income families, particularly those whose estates mainly consist of residential property. Inheritance tax is levied on the estate of a deceased individual, which includes property, money, and possessions.
Generally, inheritance tax is not payable if the estate’s value is below the £325,000 threshold, or if assets above this threshold are left to a spouse, civil partner, a charity, or a community amateur sports club. However, even when the estate falls below this threshold, there may still be reporting obligations.
The rules provide a higher threshold of £500,000 if the deceased leaves their home to their children (including adopted, foster, or stepchildren) or grandchildren. Moreover, for married couples or civil partners, any unused threshold can be transferred to the surviving partner upon death, effectively increasing the combined threshold, as detailed in HMRC guidance.
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Despite these provisions, concerns persist regarding the tax’s impact. Liberal Democrat MP for North East Hampshire, Alex Brewer, has queried HMRC about the implications for middle-income households, particularly focused on how inheritance tax affects their ability to cover social care costs and the proportion of estates liable for the tax over the past five years.
Responding on Thursday, 3 September, James Murray, Financial Secretary to the Treasury and Paymaster General, on behalf of Chancellor John Healey, stated: “Inheritance tax is paid by a small proportion of estates. In the 2023-24 tax year, fewer than 5% of UK deaths resulted in an inheritance tax charge.
“No inheritance tax is payable on assets passed to a spouse or civil partner. Additionally, various nil-rate bands and reliefs apply, including a £325,000 nil-rate band and a residence nil-rate band of £175,000 for qualifying residences left to direct descendants, such as children or grandchildren.
“This allows qualifying estates to pass on up to £500,000, and surviving spouses or civil partners may collectively pass on up to £1 million without incurring inheritance tax.”
He clarified that inheritance tax is only applied after death and therefore should not affect an individual’s ability to fund social care costs during their lifetime. Data on the proportion of estates liable for inheritance tax is publicly available via the government’s website.
Looking ahead, former Chancellor Rachel Reeves announced in her first Budget in late 2024 that, starting from April 2027, unused inherited pensions and death benefits will be included within a deceased’s estate for inheritance tax purposes. An update issued in May detailed that personal representatives will be responsible for reporting and paying any inheritance tax due on ‘notional pension property’. Upon vesting such property to beneficiaries, they become jointly liable alongside personal representatives for any associated tax.
In typical circumstances, pension scheme administrators are not liable for inheritance tax; however, they may become liable if they fail to comply with valid withholding or payment notices.
The Office for Budget Responsibility notes that inheritance tax is charged on the total value of an estate after deductions for liabilities, exemptions, and reliefs. Assets left to a spouse, civil partner, or charitable organisations are usually exempt.
Inheritance tax is forecast to generate £8.7 billion in the 2025-26 financial year, accounting for 0.7% of all tax receipts and approximately 0.3% of national income, equating to around £300 per household.
The standard rate of inheritance tax remains at 40% on estate values exceeding the £325,000 threshold, which is frozen until 2030-31. Unused portions of this threshold can be transferred between spouses or civil partners, potentially increasing the combined threshold to £650,000.
There is also an additional transferable residence nil-rate band of £175,000 available when a home is left to direct descendants. Furthermore, if at least 10% of the net estate value above the threshold is donated to charity, the inheritance tax rate is reduced to 36%.