Inheritance tax set to get even more unpopular

UK Government looks set to target £1 trillion of retirement savings held in private pension pots, writes David J Alexander.

Inheritance tax (IHT) is often said to be the most unpopular tax in the UK. While all tax is unpopular, IHT is seen as being particularly punitive because it punishes savings and aspiration. Therefore, the announcement that annual revenues for the tax have reached a record high will have produced few cheers other than within the offices of HMRC.

The latest inheritance tax figures show revenues rising by nearly 10 per cent over the last year, increasing by £0.8 billion to reach £8.2bn between April 2024 and March 2025. The Institute for Fiscal Studies has stated that the proportion of estates hit by inheritance tax is likely to rise from about 5.5 per cent currently to 7 per cent in 2032-33. Over the same period, government revenues from the tax will rise from £8bn to £15bn.

Inheritance tax (IHT) has had its threshold frozen at £325,000 since 2009 and is currently set to remain at that level until 2030 at the earliest. Had it risen by inflation in the intervening years it would stand at £510,921 by March 2025.

As if it couldn’t get worse the Labour Government is planning to revise IHT to pull in even larger revenues in the coming years. From April 2027 it is reported that they intend to target £1 trillion of retirement savings held in private pension pots. It is anticipated that this move will increase the number of estates liable for IHT by a quarter. Now pensions will be targeted alongside homes in the rush to tax savers and homeowners. Of further concern is a recent report which showed that thousands more grieving families are facing investigations into their inheritance tax liabilities as HMRC seeks to target underpayments. The Revenue launched 3,961 investigations in the year to 5 April 2025, which is an increase of 31 per cent on the previous year. With interest charged on overdue IHT standing at 8.5 per cent – the highest rate for 18 years – this will be costly to bereaved beneficiaries.

As well as the financial cost there will also be an emotional cost to families. With the average inquiry taking 558 days – during which time the executors are blocked from distributing the estate to the beneficiaries – this can be a prolonged and painful process at a difficult time.

The UK Government likes to present IHT as only hitting the very wealthiest in society. The truth is that the richest have accountants and advisers to severely reduce their liability while it is those with smaller estates who will be drawn into paying this tax.

It can’t be right that a homeowner who wishes to pass on something to the next generation should be punished for buying a home which has risen in value beyond £325,000. Taxing thrift, savings and aspiration should never be government policy.

But homeowners have always been an easy target as they cannot hide their main asset, which is their property, so policymakers see it as an easy target to raise revenue. But there is little doubt that inheritance tax – which is already regarded as a deeply unfair tax – is likely to become even more unpopular as the government shifts its focus on to pensions as well as assets.