Key Takeaways
- Prime Minister Andy Burnham has previously voiced his support for reforming inheritance tax so wealthier estates pay more tax.
- One option available to chancellor John Healey is to scrap IHT altogether and replace it with a social care levy.
- Changes to the IHT regime are already due to start in April 2027, with private pensions potentially subject to a 40% tax.
Ahead of changes already announced for April 2027, speculation is growing that chancellor John Healey will reform, consolidate, or even abolish inheritance tax (IHT) at the upcoming annual budget on Oct. 28. Currently paid by around 5% of estates, reforms could see more people pay the tax as the government faces increasing pressure to raise money to fund defense, social care, NHS spending, and help with the cost of living.
Financial advisors and pension firms are already braced for a significant shift next year. Under a change announced in the 2024 budget, pensions are due to be brought into the IHT regime from April 2027, meaning that unspent pension pots will be potentially subject to a 40% tax, losing their current tax-free status.
“The rules are pushing pensions back toward what they were originally designed for: funding retirement. But the real value now comes from planning what should happen to the pension during your lifetime and not after it,” says Tom Skinner, founding director of financial advice firm Barnaby Cecil.
He adds that trying to make changes ahead of the new rules could create other tax liabilities.
“That doesn’t mean the answer is to cash the pension in. Withdrawals can create income tax [liabilities] and gifting has its own rules. It may mean using the pension more deliberately during your lifetime while coordinating withdrawals, and gifting, perhaps, [so] the rest of the funds sit outside of the estate.”
How Does Inheritance Tax Work and What Is Changing in 2027?
- IHT is a levy an individual’s estate after death. This can include property, ISAs, shares, and from April 2027, defined contribution pensions.
- HMRC collected £8.5 billion in IHT receipts in the last financial year.
- The “nil-rate band” gives an individual a £325,000 tax-free allowance before paying IHT at 40%. Along with property allowances, the effective threshold for a married couple is just over £1 million. These thresholds are frozen until 2031.
- Around 5% of estates currently pay IHT but the IFS expects this number to rise to 12% by the 2032-33 tax year.
Could a 10% Social Care Levy Replace Inheritance Tax?
Inheritance tax changes could be aligned with one of the prime minister’s biggest priorities: reforming social care.
“He has said on several occasions that the current inheritance tax system should be replaced with a social care levy, involving a lower headline rate of tax applied to a broader base,” says Schroders’ head of wealth planning James Gladstone.
One version of this idea is a 10% levy on all estates at the point of a person’s death, which would transfer the demographic impact of IHT from wealthier asset owners to the general population. However, Burnham has previously made clear that “the wealthiest people would pay the most” under his plans, indicating that he is likely to target larger estates if the rules do change.
Could Inheritance Tax Rules on Property Change?
This could be combined with changes to the IHT rules surrounding property.
The IFS says that, at present, the nil-rate band on property “is of greater benefit” to estates in the South of England and London, arguing that “there is a clear case for eliminating the special treatment of all of these types of assets.” Given Andy Burnham’s previous comments on land being “undertaxed,” it’s possible there could be wider changes to capital gains tax, stamp duty, and council tax at the Autumn Budget.
Will IHT Actually Be Scrapped in the Autumn Budget?
For some, IHT reform does not go far enough: the Reform party has pledged to scrap the levy altogether.
In office, the Conservative party considered scrapping IHT but did not go through with these plans. Ben Ramanauskas, an academic and former advisor to Conservative prime minister Liz Truss, says that abolishing the tax would be “both economically sound and incredibly popular.”
Scrapping IHT may even be palatable to the prime minister, albeit with a catch.
“I would be prepared to accept the abolition of inheritance tax on condition that we tax the wealthy properly while they are alive,” Burnham said in 2024, when he was outside of government.
If it was scrapped in isolation, 90% of those estates not paying IHT would see no change, the IFS says. As part of a bigger taxation overhaul, more significant changes could add greater complexity to people’s financial affairs, the think tank says.
