Will your offspring have to pay inheritance tax (IHT)?

The threshold for those who do or don’t have to pay may be getting much closer in the future.

Subject to legislation, from April 2027, IHT will be charged on pensions, which potentially means many more people could be affected by IHT.

In the tax year 2021/22, there were 27,800 taxpaying IHT estates – a rise of 3% from the year before.[1] But after last year’s Autumn Budget, the Office for Budget Responsibility estimates that by 2029/30, IHT receipts are forecast to rise to £14.3 billion. [2]

These changes won’t affect everyone, but it’s still important to be prepared. We’ve looked at what this could mean for you and what you might need to consider.

A recap on IHT

IHT is chargeable (usually at 40%) on anything in your estate above the ‘nil-rate band’. This has been frozen at £325,000 since 2009 and will be until 2030. In addition, there’s also a residential nil-rate band of £175,000 if you’re passing on your home to direct descendants.

If you’re married or in a civil partnership, the threshold for whoever inherits your estate can technically rise to as much as £1 million (2x nil-rate bands and 2x residential nil-rate bands).

But that £1 million isn’t as big as it first seems.

Think about the rising price of property for example. The number of property millionaires is steadily increasing. If you live in London, one in 11 homes is valued at more than £1 million.[3]

And, importantly, in two years’ time, your pension will no longer be exempt from your estate, bringing a lot more estates into scope.

Let’s look at three examples

Jack and Diane plan to leave their £700,000 home to their two children. They also have some cash in an emergency fund. Their £2.8 million pension is currently IHT exempt. Under the current rules, there wouldn’t be any tax for their children to pay. But post 2027, their taxable estate would be worth £3.5 million. They also lose their residential nil-rate band, which is tapered by £1 for every £2 their estate exceeds £2 million. In their case, this applies to both individuals, meaning the allowance is removed entirely once the estate exceeds £2.7 million.

Stephen is recently divorced, so he won’t inherit his former partner’s IHT exemptions. He has assets worth just under £2 million that include his three-bedroom home. This would incur a charge under the present rules, but with his pension taking his estate up to £3 million, from 2027, there would be more to pay.

John and Alice have their family home, a four-bedroom detached house worth £550,000. They’ve paid off the mortgage, saved hard and have £300,000 in a savings account plus a £600,000 pension pot.

What can be done?

The good news is there are a number of solutions to consider. However, none of them are that simple.

One of the most common methods is by gifting some of your money during your lifetime to reduce the value of your estate – there are a number of different allowances that can be used for this including the 7-year rule and gift allowance, which you can find out more about here.

This has the added bonus of being able to see others benefit from the legacy you’re passing on – whether that’s helping children or grandchildren with university fees or a deposit on a property, for example.

However, if you would like to give more direction on how your money is spent, many prefer to put their money in a trust.

There are two main types – the first is an absolute or bare trust, which goes directly to a named beneficiary and is usually applied when it’s a young person who is likely to inherit the money or assets. They can claim the trust once they reach 18 in England and Wales and 16 in Scotland. Gifts to this kind of trust are treated as a ‘potentially exempt transfer’. They are only exempt from your IHT liability once seven years have passed.

The second is a discretionary trust. These are more flexible and can adapt to family circumstances. You can name beneficiaries, or define them as ‘classes’ (for example, prescribing that it goes to all current of future grandchildren). Trustees (who you pick) have discretion over how and when the trust fund can be distributed.

These are treated as a ‘chargeable lifetime transfer’. You can give an amount equivalent to the nil-rate band in total during a rolling seven-year period. Anything over this may be liable for an entry charge – 20% of the value of the estate above the nil-rate band (this is still less than the usual IHT of 40%).

You’ve got time

The good news is that none of this is happening until 2027, and there is still a lot of detail to be ironed out in the ongoing government consultation. While it’s always a good idea to start inheritance tax planning early we’ve got time to help you get the solution you need.

Please get in touch to find out more.

Please note The Financial Conduct Authority does not regulate Inheritance Tax Planning and Trusts.

The value of your investments, pensions and the income from them can fluctuate (this may partially be the result of exchange rate fluctuations) and you may get back less than the amount invested.

Past performance is not a guide to future performance

The information in this blog was correct as of 30 April 2025.

[1] Source: Inheritance Tax liabilities statistics: commentary - GOV.UK

[2] Source: Office for Budget Responsibility CP 1289 – Office for Budget Responsibility – Economic and fiscal outlook – March 2025

[3] Source: Savills UK | Number of property millionaires increased by 34% over the past five years

Watch out! Inheritance tax isn’t just for the super rich