Wealth management trade association PIMFA has warned that draft inhteritance tax reforms are unworkable in their current form.

The House of Lords Finance Bill Sub-Committee has begun a consideration of government proposals to impose inheritance tax on pensions on death.

Nearly one in 10 estates liable for inheritance tax paid more than £500,000 in the latest available year, with the number expected to soar from April 2027 when pensions are set to be included in IHT calculations.

In the 2021/22 tax year, 2,520 estates paid more than £500,000 in IHT, a 29% increase over three years.

If the trend seen over three years to the end of 2021/22 continues, more than 3,524 estates will pay £500,000 or more in IHT by end of the current tax year.

The figures were obtained through a new FOI by wealth manager Rathbones.

They showed that of the 27,850 estates liable for IHT in the 2021/2022 tax year, 1,630 paid between £500,000 and £999,999 in IHT, while a further 890 estates paid more than £1m.

That totals more than 2,520 estates, 9% of all estates in the year that were liable for inheritance tax. That represents a 29% increase from the figure recorded at the end of the 2018/19 tax year, and the number is rising, Rathbones warned.

Rebecca Williams, divisional lead of Financial Planning at Rathbones, said: “More and more people will be caught out by IHT charges, despite the availability of gifting allowances and the seven-year rule. The deep freeze on both the main nil-rate band and the residence nil-rate band, unchanged since 2009 and 2017 respectively, has led to a creeping form of fiscal drag.

“As house prices and asset values have steadily risen, more estates are being brought into the IHT net simply because the thresholds haven’t kept pace with inflation.”

She said the issue will worsen from April 2027, when pension assets are brought into the fold and the change could pull even modest estates into scope for IHT.

She said that makes it increasingly vital for families to engage in effective Financial Planning. “Without proactive steps, more estates will find themselves facing IHT bills they might not have anticipated.”

Additional research by Rathbones on the impact of the Government’s plans around IHT found that nearly one in three, 31%, people with pensions say they are put off making further contributions to their pension pots by the changes, which means they lose the tax efficiencies of pension saving.

The money they are no longer contributing to their pensions is most likely to be put in cash – around two out of five, 39%, questioned said they will deposit the money in savings accounts while 25% plan to invest some of the money in equity ISAs.

Almost one in seven, 14%, questioned say they have already changed their focus to property investment as a result of the decision.

Rathbones commissioned Viewsbank to survey 619 people with pensions, cash ISAs, investment ISAs, shares, investment funds and cash savings between March 14th and March 17th,. The sample represented the demographic profile of the UK.

IHT tax liabilities created in 2022-23 were £6.7bn, up £0.71bn or 12% compared to the previous year.

Charging inheritance tax on unused pension funds will create confusion and increase the risk of gifting mistakes for the Bank of Mum and Dad and Gran and Grandad, equity release specialist Key Advice has warned.

Plans to make the unused pension pots of people who die before the minimum pension age subject to inheritance tax, have been termed ‘unfair’ by SSAS provider the WBR Group.

Inheritance tax receipts climbed £200m rising 5.7% in the three months to the end of August, new HMRC data published today revealed.

For April to August IHT receipts were £3.7bn.

That keeps the figure on target to be another record-breaking IHT year, with the OBR’s most recent forecast, predicting IHT will generate £9.1bn for the Treasury in 2025/26.

Last year’s record-breaking year of IHT receipts saw £8.2bn collected through the tax.

Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, said: “With the Autumn Budget looming, another rise in IHT receipts adds to the pressure on families already bracing for change.

“We’re seeing growing panic, with clients eyeing drastic steps like withdrawing pensions early in a bid to stay ahead of possible tax bills. But these knee-jerk moves can backfire, triggering bigger tax bills or long-term financial pain.”

Ian Dyall, head of estate planning at Evelyn Partners, said: "The continued rise in inheritance tax receipts is the result of ‘fiscal drag’, with a long-standing freeze on the IHT nil-rate bands spanning a period when asset prices have risen. With the NRBs frozen until 2030, raised property values and investment assets are drawing more families into the IHT net—often without them realising it.

“This is before the changes to IHT reliefs announced at the 2024 Budget have come into force – changes that are already reshaping estate planning.”

He warned: "The rise in receipts is not just a fiscal story, it’s a wake-up call. Many households are sleepwalking into substantial tax bills.”

Monthly IHT receipts. source: HMRC

Stephen Lowe, director at retirement specialist Just Group, said: “As the Chancellor continues to feel the fiscal pressure, and having ruled out hikes on major taxes, she will want to explore all her options to raise revenue. Given inheritance tax targets those who are wealthiest in society it’s entirely possible that it will once more be in the Chancellor’s sights.”

Nicholas Hyett, investment manager at Wealth Club said: “As things stand inheritance tax may only affect around 1 in 20 estates, but that number is on the increase as an ever greater number of estates become liable for the most hated of taxes. Years of freezes in thresholds, matched with increasing house prices and rising inflation have pushed more families, who might not consider themselves to be wealthy and would not historically have qualified for the tax, over the threshold.”

The current inheritance tax allowance has been frozen at £325,000 for 16 years, and remains frozen until 2030. The £175,000 residence nil rate band hasn’t changed since 2020.

Inheritance tax receipts for April to June were £2.2bn, over £100m higher than the same period last year, according to new HMRC figures published today.

At the end of July, we had confirmation that the Government is ploughing ahead with plans to include “unused” pension funds in a deceased’s estate for inheritance tax (IHT) purposes.