Concerns have been raised in Parliament about how inheritance tax affects middle-income families, particularly those whose estates are predominantly residential property.
Inheritance tax (IHT) applies to the estate of a deceased person, including property, money, and possessions. Generally, no IHT is payable if the estate’s value is below the £325,000 threshold or if assets above this amount are left to a spouse, civil partner, charity, or a community amateur sports club. Even when an estate falls below the threshold, its value may still need to be reported.
The threshold increases to £500,000 when a home is passed on to children (including adopted, foster, or stepchildren) or grandchildren. Additionally, if married or in a civil partnership and the estate is below the threshold, any unused allowance may be transferred to the surviving partner, effectively raising their threshold.
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Despite these provisions, concerns persist. Alex Burghart, Liberal Democrat MP for North East Hampshire, questioned Chancellor John Healey about the impact of IHT on middle-income households with property-heavy estates, including potential effects on social care funding. He also inquired about the proportion of estates liable for IHT over the past five years.
Responding on 3 September, James Murray, Financial Secretary to the Treasury, stated that fewer than 5% of UK deaths in the 2023–24 tax year resulted in an IHT charge. He emphasised that no IHT is due on assets passed to spouses or civil partners and noted the existing nil-rate bands and reliefs, including the residence nil-rate band, which allows qualifying estates to pass on up to £500,000 tax-free. Surviving spouses or civil partners may effectively pass on up to £1 million without IHT liability.
Murray added that IHT should not affect individuals' capacity to fund social care, as the tax is only paid on estates after death. Detailed statistics on IHT liabilities are published online by HMRC.
Looking ahead, following former Chancellor Rachel Reeves' 2024 Budget, changes will take effect from April 2027 where inherited unused pensions and death benefits will be included within the deceased’s estate for IHT purposes. Personal representatives will be responsible for reporting and paying any IHT due, with beneficiaries and potentially pension scheme administrators also bearing liability under certain circumstances.
The Office for Budget Responsibility notes that IHT is charged on the total value of a deceased individual’s estate after deductions for liabilities, exemptions, and reliefs. Assets left to spouses, civil partners, or charities usually qualify for exemptions.
For 2025–26, IHT is forecast to raise £8.7 billion, about 0.7% of all tax receipts and 0.3% of national income, or roughly £300 per household.
The standard IHT rate is 40% on estate values exceeding the £325,000 threshold, which remains frozen until 2030–31. Unused thresholds can transfer between spouses or civil partners, potentially increasing the combined allowance to £650,000. An additional transferable residence nil-rate band of £175,000 applies when a home is inherited by children or direct descendants. Furthermore, the IHT rate can be reduced to 36% if 10% or more of the estate’s net value above the threshold is donated to charity.