A grim reality is dawning on many families: the likelihood of their children facing inheritance tax. This tax, once considered a distant concern for the ultra-wealthy, is now a looming threat for the middle class. The government's aggressive approach to inheritance tax is set to double its revenue by 2030, and the consequences are far-reaching.
The Office of Budget Responsibility's forecast paints a stark picture. Inheritance tax is projected to bring in a staggering £14.5 billion by 2030-31, a significant increase from the £8.3 billion collected in 2024-25. This surge in revenue highlights the government's expanding reach into the pockets of the middle class, a demographic previously considered immune to such taxes.
Rachel Reeves' announcement further solidifies this trend. The inheritance tax threshold, frozen at £325,000 since 2009, will remain unchanged until April 2031. This means that for 22 years, the threshold will have remained stagnant, despite rising house prices and inflation. As a result, more families are finding themselves unexpectedly caught in the inheritance tax net.
The residential nil-rate band, introduced in 2017, offers an additional £175,000 allowance for estates worth up to £2 million when passed to direct descendants. However, this measure has failed to provide adequate protection for many families, leaving them vulnerable to inheritance tax.
If the inheritance tax threshold had kept pace with inflation, it would now stand at over £523,500, and the residence nil-rate band would have risen to £236,000. Instead, the government has employed fiscal drag to an extreme degree, transforming a tax once reserved for the wealthiest into a 40% bill that middle-class families must now confront.
In 2009, only 3% of estates paid inheritance tax. By 2030, this figure is expected to soar to 10%. The number of estates liable for inheritance tax is projected to reach 63,100 in 2029-30, nearly double the 32,200 forecast for the current year. Unless the threshold is increased, many more families will find themselves ensnared.
The situation is further exacerbated by the government's decision to bring pensions into estates for inheritance tax purposes from April 2027. This move significantly reduces the chances of escape, although pensions left to a spouse or civil partner will remain exempt.
The impact of inheritance tax extends beyond financial considerations. Most of those paying this tax are not high-earning executives or successful business owners but grieving family members. Brothers, sisters, children, and grandchildren who rely on their inheritance to pay off mortgages, pursue higher education, or start families may find themselves burdened with an unexpected 40% tax bill.
Inheritance tax has long been Britain's most despised tax, affecting only a small minority. However, the impending grief it is about to cause is a stark reminder of its growing relevance and impact on the lives of ordinary citizens.
