Homeowners in England are set to encounter an Inheritance Tax bill of £82,158 from HMRC starting in 2027 due to modifications unveiled in the Budget. Quilter has determined that the average liability for an individual possessing an average-valued home (£290,395) and a moderate pension pot (£415,000) stands at this amount.
HMRC has officially stated that beginning April 2027, pension savings will be factored into the estate of a deceased individual, potentially subjecting retirement savings to Inheritance Tax. Currently, inheriting a pension from someone passing away before 75 incurs no tax, while if the person is over 75, Income Tax is payable upon drawing from the inherited pension as part of income.
The new data from Quilter highlights that cohabiting families with young children, ineligible for certain Inheritance Tax exemptions due to their unmarried status, will face increased vulnerability. Inheritance Tax becomes applicable when the estate value surpasses £325,000, with a standard 40% rate on the amount exceeding this threshold.
Nevertheless, no Inheritance Tax is due when the estate is bequeathed to a spouse or civil partner. Transferring your home to children or grandchildren can raise the Inheritance Tax threshold to £500,000, inclusive of the basic allowance and an additional sum. Unused Inheritance Tax allowances can be passed on in case of marriage or civil partnership, allowing the potential transfer of up to £1 million tax-free.
Despite joint ownership scenarios where only half the property’s value is considered, a typical family in England may still face an Inheritance Tax bill of £24,079 due to pension inclusion. In instances of sole ownership, the bill can exceed three times that amount. For instance, in London, sole ownership of an average-priced home along with a pension could lead to an Inheritance Tax bill of £192,254 in 2027.
Additionally, across Wales, Scotland, and Northern Ireland, joint-ownership cases may incur bills of £23,891, £21,392, and £20,007, respectively, which could escalate if house prices surge prior to the implementation of the new rules. Jon Greer, head of retirement policy at Quilter, criticized the policy, emphasizing the harsh impact on cohabiting families and advocating for policy adjustments to alleviate the financial burden on bereaved families.