With the next UK Budget approaching, newspapers are full of alarming headlines about possible UK Inheritance Tax changes especially when linked to the last UK Budget announcement regarding pensions now potentially forming part of your estate for Inheritance Tax (IHT) purposes. Many of these stories come from leaks, think-tank reports, or speculation — and while some ideas are being explored, most remain rumour rather than confirmed policy. Having recently read a couple of articles and attended IHT ‘seminars’ it is clear that certain advice firms are quite alarmist about potential changes.
Here’s a calm look at seven of the most talked-about proposals and what they could mean in practice.
1. National Insurance on Rental Income.
It’s been reported that the Treasury has considered charging National Insurance contributions on rental income. If introduced, this would mostly affect landlords with buy-to-let portfolios. At present, it’s only an option under review — not law.
2. Capital Gains Tax on Main Homes.
The idea of taxing capital gains on primary residences surfaces often, but it would be politically explosive. Any change would likely focus on very high-value properties rather than ordinary homes. For now, the main residence exemption remains in place.
3. Gifts and the “Seven-Year Rule”
Current rules mean that gifts fall outside the estate after seven years. Speculation suggests this period could be extended to 10 years, or that lifetime gifting rules could be tightened. Nothing has changed yet, so existing allowances and exemptions still apply. Gifting remains one of the main ways to reduce Inheritance Tax liability.
4. Pension Lump Sum Limits
The maximum tax-free lump sum from pensions is currently £268,275. Reports suggest officials have modelled a much lower cap of £100,000, but this has not been announced. If you are considering a withdrawal, get professional advice before making decisions. Here the team at Aisa International and OpesFidelio Cyprus can help. Call us on (00357) 26 951 600 to make an appointment.
5. A One-Off Wealth Tax
Think-tanks and commentators often raise the idea of a one-off levy on wealth, perhaps targeting non-doms or the very wealthy. In practice, such a tax would be hard to implement and remains unlikely.
6. Exit Tax for Leavers
Some commentators have suggested an “exit tax” on those leaving the UK, similar to systems in other countries. While possible, this would be legally complex and politically sensitive. For now, it’s just an idea.
7. Inheriting Pensions at High Tax Rates
The most dramatic headline is that beneficiaries could face up to a 69% tax charge on inherited pensions. This figure reflects worst-case modelling where both inheritance tax and income tax apply. In reality, outcomes will vary widely depending on the type of pension and how benefits are taken.
From 2027/2028 When the beneficiary draws money from the inherited pension, withdrawals are taxed as income at their marginal rate which will be up to 45% for UK additional-rate taxpayers.
Some will say it is scaremongering. Presentations and articles trying to worry individuals into making rash decisions. Let’s add some facts
• 2021–22: about 27,800–27,850 estates paid UK Inheritance Tax
• 2022–23: 31,500 estates paid Inheritance Tax. (latest confirmed year)
In 2021–22, there were about 646,000 deaths registered in the UK. That means around 27,800 estates paid IHT out of ~646,000 deaths — so just over 4% of deaths resulted in an IHT liability.
There’s a consensus that for 2027/2028 that even with new rules including pensions that only around 10,500 additional estates may be liable for UK IHT.
Do note that in the new legislation – Death In Service payments will be exempt from IHT. Transfers to spouses, civil partners and charities will remain tax free.
What You Should Do Now
• Don’t panic or make rash moves based on headlines. As can be seen the vast majority of families will not be paying IHT.
• Keep clear records of gifts, property costs, and pension entitlements.
• Book a review with a regulated adviser if you have significant UK pensions, a UK rental portfolio, or an estate over £1 million.
• For those living abroad consider how long you have lived abroad, and what assets you have remaining in the UK.
• Update wills, trusts, and estate plans so you’re ready for any changes.
Most importantly: remember that speculation is not legislation. Sensible planning today will leave you well-placed whatever the Chancellor announces on Budget day. Proper planning will help you to reduce or eliminate your Inheritance Tax burden and pass your wealth to future generations.
The UK Government Consultation Outcome can be found here UK government consultation page
