TaxtChancellor Rachel Reeves’s changes to inheritance tax rules will cost the average English homeowner over £82,000 from 2027, according to new analysis.
Under reforms announced in the October Budget, pension pots will no longer be exempt from inheritance tax starting in April 2027. This change means that unspent private pensions could face a tax rate of up to 40%, significantly increasing the number of families liable for death duties.
For a single, working-age homeowner in England with an average property value of £290,395 and a pension pot of £415,000, the amount required to fund a moderate retirement, according to Pensions UK, the inheritance tax bill could reach £82,158.
The shift is expected to nearly triple the proportion of estates paying inheritance tariff, from 4% currently to 9.7% under Labour’s plans. Even modest estates will be pulled into the tariff net as a result.
In London, where property prices are higher, the impact will be even more severe. A sole homeowner with an average home worth £565,637 and a pension of £415,000 would face a tariff bill of £192,254, even after standard inheritance tax allowances are applied, according to calculations by wealth manager Quilter.
Who inheritance tax applies to
Currently, inheritance deduction applies to estates worth more than £325,000 the nil-rate band with an additional £175,000 allowance when the main home is left to direct descendants.
Rising property values are expected to compound the issue. Rightmove forecasts a four per cent increase in English house prices in 2025, which will further inflate inheritance tax liabilities before the new rules are enforced.
At present, pension pots can be passed on tax-free if the saver dies before the age of 75, up to a limit of £1.07 million. If the deceased was over 75, beneficiaries pay income tax on inherited pensions. From April 2027, however, death duties of up to 40% will apply to unspent pensions, regardless of age.
The Treasury estimates this change will generate around £1.5 billion per year by 2029–30.
In a controversial move, the new tax will apply even if the pension holder dies before reaching the minimum pension age of 55. This has raised concerns about the fairness of deducting pension savings that the individual never had the chance to access.
Critics warn the reforms will disproportionately affect unmarried couples, who lack the spousal exemptions that protect married partners from inheritance deduction. These couples also cannot combine their tax-free allowances, making them more vulnerable to large tariff bills.
Jon Greer, head of retirement policy at Quilter, said: “Charging inheritance tax on a pension someone never accessed because they died before pension age is optically terrible for the Government.
It’s especially unjust for cohabiting families, who lack any spousal relief or transferable allowances. A grieving family with young children and an average-priced home could face six-figure bills at the worst possible time.”
He added that policymakers should consider transitional reliefs or exemptions in cases involving younger working-age deaths, particularly where children are involved.
A Treasury spokesperson defended the policy, saying: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth.
More than 90% of estates each year will continue to pay no inheritance tariff after these and other changes.”
There are also reports that Ms Reeves is considering further reforms, including introducing a lifetime cap on the value of gifts individuals can make tax-free before death, a move likely to attract further scrutiny from families and financial planners alike.
