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Frozen tax thresholds and rising house prices mean more families are paying inheritance tax when loved ones die.
Between April 2025 and February 2026, the total value of IHT paid reached £7.7 billion - £100 million more than the same period the previous year. And with pensions becoming subject to the dreaded death tax from April next year, it’s hardly any wonder that IHT is weighing heavy on many retirees’ minds.
But confusing tax rules mean many people may be worrying unnecessarily, as we’ll explain.
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At a rate of 40%, it’s understandable that inheritance tax (IHT) strikes fear in the hearts of people who want to leave as much of their wealth to their family as possible.
But Sue Allen, a financial planner at Chester Rose, says many retirees could be worrying unnecessarily.
“It’s something I see more often than you might expect. People come to us concerned about inheritance tax, worried that a large portion of their estate will end up with the taxman, however when we take a step back and look at the full picture, it sometimes turns out there isn’t actually a liability at all.”
She says it’s particularly true of so-called ‘baby boomers’ in their 60s and 70s, who have worked hard to build a comfortable lifestyle. “They may have a valuable home, a good income in retirement, and perhaps a final salary pension. On the surface, it can feel like they must be over the IHT threshold.”
Bernard Rust, chartered financial planner at Shackleton Advisers, adds: “Inheritance tax has an uncanny ability to loom large in people’s minds. For many, it’s a source of real anxiety – a sense that a sizeable chunk of what they’ve worked hard to build will ultimately end up in the hands of the Treasury.”
Clare Moffat, pensions and tax expert at Royal London, says: “While it’s frequently labelled Britain's most hated tax, only about 4% of estates [1 in 25] actually pay it at present.”
That number is expected to rise in future years; thresholds remain frozen until April 2031, house prices will likely continue to rise and pensions are set to become taxable from April next year.
According to the Office for Budget Responsibility the number of estates that will pay IHT will reach 9.3% by 2030. It predicts receipts could reach £14.5 billion a year by then.
But that will still only represent one in 11 estates, meaning the vast majority of families will not pay it.
Sue Allen says there are several reasons where IHT rules may be misunderstood.
“Pensions are a good example of where confusion can arise. The rules are changing from April 2027, with most pensions expected to be brought into the inheritance tax net. However, this doesn’t affect all pensions in the same way, and it’s easy to assume the impact will be bigger than it actually is.”
For example, when you die, a defined benefit (or final salary) pension won’t leave a pot of unspent cash to your loved ones, like defined contribution pensions (including personal pensions and SIPPs). “Instead, they provide an income during your lifetime, and sometimes a dependant’s pension afterwards. So, while they are incredibly valuable, they don’t translate into a large inheritance tax liability.”
The same applies if you have used your defined contribution pension pot to buy an annuity.
Moffat also thinks that pensions aren’t likely to be as problematic as many people fear – particularly for married couples. “Many people don’t save enough in their pension to enjoy the retirement they want, so their pension might be used up before they die. Pensions are usually left to a husband or wife [IHT-free], and if they don’t have much saved themselves, they’ll need this pension to help boost their own savings.”
Property can also add to the confusion. Allen adds: “House prices have risen significantly over the years, particularly in parts of the UK, and it’s easy to assume that owning a valuable home automatically means an IHT issue. However, there are allowances available, including the standard nil rate band and, in many cases, the main residence nil rate band, which can significantly increase the amount you can pass on tax free, particularly if you’re leaving your home to direct descendants.”
Currently everyone can pass on an estate worth £325,000 without paying any inheritance tax. This is the ‘nil rate band’.
But you may well be able to pass on significantly more than that to your family, depending on your circumstances.
If you’re passing on a family home to direct descendants, you will have an additional allowance worth £175,000, called the ‘residence nil rate band’.
Direct descendants include children, grandchildren and their spouses (including widows or widowers) as well as stepchildren, adopted children and any children you’ve fostered (regardless of when you fostered them).
So individuals passing on a family home can pass on an estate worth £500,000 IHT-free (£325,000 plus £175,000). Married couples and civil partners could pass on up to £1m tax-free, because any transfer to the surviving spouse after the first death will be tax-free.
It’s important to note that there may be some instances where you have a lower allowance for IHT.
This may apply if your estate is particularly large. “The residence nil-rate band begins to taper away once total assets exceed £2 million, and it disappears entirely at £2.7 million [£2.35 million if you’re single or divorced],” explains Rust.
Likewise, if you have made any gifts during your lifetime (that weren’t covered by the IHT gifting allowances) and you die within seven years, their total value will count towards your nil rate band. This will effectively leave you with a reduced tax-free allowance on the rest of your estate.
Once you know how much you can pass on tax-free, you’ll need to tot up the total value of your estate.
This includes the value of your home, savings, investments and pensions (from 2027) as well as your possessions, less the value of any outstanding debts like mortgages.
Rust adds: “If your estate, including property, comes in below that level and you’re passing your home to your children or grandchildren, inheritance tax is unlikely to be an issue at all. That simple calculation alone can remove a great deal of unnecessary worry.”
The amount that is over your tax-free threshold (not your whole estate) will be taxed at 40% when you die.
If you decide you want to minimise the tax you pay, it’s important to take advice before you act: your actual liability will depend on when you die and how much money you eventually spend in retirement.
Even if you look like you’ll have an IHT liability at the start of your retirement, it doesn’t necessarily follow that you will have one at the end.
Rust says: “Sensible planning often starts with the basics: making regular gifts from surplus income, using the annual £3,000 gift allowance, or helping family members while you can enjoy seeing the benefit.”
He adds that it’s important not get carried away: “The last thing anyone wants is to give money away too enthusiastically, only to find they don’t have enough to support their own lifestyle later in life. Good inheritance tax planning should enhance peace of mind, not undermine it.”
Saga Legal has partnered with Co-op Legal Services, who provide regulated legal services, helping to ensure you have the right level of support and protection for yourself and your family. They can give advice on topics including how a will could reduce the impact of any potential inheritance tax, and why a trust will might better protect your home and savings. You can book a free legal review to get the guidance you need. After your free review, if you choose a product or service, they’ll explain any fees and costs to you clearly.
You can only use the free legal review service if you live in England and Wales. If you’re in Scotland or Northern Ireland, you can get estate planning help from Co-op Legal Service’s trusted partners.
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Worried about inheritance tax? By putting in place the right will for your needs, you can protect your home, assets and savings.
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