How inheritance tax became a penalty on the middle class (not the super-rich)

By the Editorial Team · Wednesday, October 7, 2026

The UK government plans to include pension savings in inheritance tax calculations starting in April 2027, expanding the tax's reach to more middle-income families affected by rising property values and static thresholds. This change, alongside projected increases in estates subject to the tax, could significantly raise revenue but has sparked criticism for potentially discouraging retirement savings and adding complexity for bereaved families.

Inheritance tax (IHT) in the United Kingdom, long considered a levy affecting primarily the ultra-wealthy, has increasingly become a financial burden on middle-income families, driven by a combination of static tax thresholds, rising property values, and recent policy changes. Established in the 17th century and fixed at a 40 percent rate since 1988, the tax traditionally targeted the wealthiest estates. However, growing evidence suggests that it now impacts a broader segment of the population, particularly those with significant property assets.

For the tax year 2023-24, just under 5 percent of estates faced IHT liability, but projections by the Office for Budget Responsibility (OBR) indicate this could rise to approximately 9.3 percent by 2031. In terms of revenue, receipts hit a record £8.5 billion in 2025-26 and are forecast to reach £14.5 billion by 2030, marking consistent growth over several years.

A notable recent development was the government’s decision, announced in the 2024 Budget, to begin including pension savings in IHT calculations starting April 2027. This change is expected to bring an additional 10,500 estates into the tax net and increase liabilities for another 38,500. Critics, including financial experts, have described the move as “unfair” and a “bureaucratic nightmare,” warning that it may discourage retirement savings—contrary to government efforts encouraging financial planning from a young age.

Rising property prices are a key driver of the tax’s broader reach. In London, average house prices stand around £652,000, with the South East averaging £564,000. These figures, combined with static inheritance thresholds, mean that many property-rich but cash-poor families could suddenly face significant IHT bills. Experts have referred to this situation as a “perfect storm,” with pension inclusions adding complexity during an already difficult time for bereaved families.

Currently, every estate is entitled to a nil-rate band (NRB) of £325,000 and an additional residence nil-rate band (RNRB) of £175,000 when passing on a home to direct descendants. Married couples or civil partners can combine these allowances, making the effective threshold up to £1 million. However, neither the NRB nor the RNRB has been increased in over a decade, meaning inflation and rising property values have effectively eroded the relief’s reach.

Conservative politicians have acknowledged the growing strain IHT places on middle-class households. Minister Kemi Badenoch has called the tax “morally wrong” and expressed intentions to reduce it, emphasizing a desire to support ordinary families in building generational wealth rather than just the super-rich. Party leadership has expressed similar views, with the leader stating a clear aim to cut inheritance tax but highlighting the need to balance such cuts with fiscal responsibility. Proposals under consideration include raising the thresholds or reducing the tax rate, both of which would alleviate financial burdens for thousands of families currently at risk of unexpected tax liabilities.

Despite political rhetoric promising reform, the government faces challenges in funding any reductions, and the specifics of future policy remain uncertain. Meanwhile, middle-income families, especially those in high-value property areas, continue to grapple with the increasing likelihood of inheritance tax liabilities in the coming years.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.