Early estimates from Oxford Economics show the total cost of these reforms to be around £6.6 billion in 2029/30. Badenoch also announced her ambition to scrap IHT altogether as soon as it’s affordable to do so. Government figures show just under 5% of estates had to pay IHT in 2023/24, although the Office for Budget Responsibility (OBR) projected this proportion would rise to nearly one-in-10 by 2029/30. Most people currently have a nil-rate band of £325,000 which is exempt from IHT, as well as another £175,000 for any residential property passed to direct descendants. From April 2027, unused pension funds will be included in estates’ calculations of IHT due – which is estimated to drag over 10,000 more estates into paying the tax in 2027/28
Rachel Vahey, head of public policy at AJ Bell, comments: “Easing the pain of Britain’s ‘most hated tax’ may be an eye-catching pledge for potential voters, but there is no getting around the financial consequences. Kemi Badenoch’s party conference pledge is designed to drive a wedge between the policies of the Conservatives and Labour – but also Reform. Labour’s policy to bring unused pensions into IHT will drag thousands of estates into the tax net, while Reform have said that IHT is not a priority for them should they form a government.
“Badenoch gave her supporters the message they wanted to hear: that it is her long-term ambition to scrap IHT as soon it is as affordable to do so. But in the meantime, she also pledged, if elected, to remove family homes from IHT altogether, as well as increasing the combined nil-rate band to £1 million for couples. Although we remain light on details of exactly how this could work, it would likely involve increasing the individual nil-rate band to £500,000.
“But these potential changes do not come cheap. Early estimates from Oxford Economics have put the cost at an eye-watering £6.6 billion in the first year (2029/30), with the expectation that costs would soar in future years. Badenoch says that gap can be filled through welfare cuts, but delivering those savings is far easier said than done. On top of that there is a real risk the policy simply becomes viewed as a blatant transfer of wealth from low-income and vulnerable families to larger estates.
“Fewer than 5% of estates currently pay inheritance tax, but the OBR has estimated that figure is expected to approach one-in-10 by 2030. Bringing unused pensions into the inheritance tax net from April next year will help that acceleration by catching more families with a tax they never expected to face.
“The fundamental problem is that inheritance tax is becoming more common, and a tax paid by more estates, while remaining deeply unpopular. As its reach expands, so will the pressure for change.
“A perusal through the historic Conservative playbook shows that in 2007 when George Osborne promised to boost the IHT nil-rate band to £1 million while in opposition, he managed to shore up support for his party at the same time as damaging the sitting prime minister, Gordon Brown. Badenoch must be hoping for a repeat experience.
How much could an increase in the allowance cost?
“Badenoch promised the Conservative delegates two big changes to IHT. The first is to exclude family homes from IHT altogether, and the second is to allow couples to give an additional £1 million tax free. Oxford Economics have said combining a full exemption for primary residences with an increase in the nil-rate band to £500,000 could mean a cut to tax receipts of £6.6 billion in 2029/30, with the number of estates paying IHT falling by around half.
“The inheritance tax nil-rate band of £325,000 was originally set way back in 2009, but successive governments have kept it in the deep freeze since then, with the Starmer administration pledging not to thaw it until April 2031 at the very earliest. Though details have yet to be laid out, Badenoch likely intends to increase it to £500,000, far closer to the £520,000 it would now be worth had it been allowed to increase in line with inflation over the last 17 years.
How many people actually pay IHT?
“The latest government figures suggest that IHT is set to hit another annual record, with frozen nil rate bands cutting deeper in the face of rising house prices and investment values. Official figures show that fewer than 5% of estates paid inheritance tax in 2023/24, but it doesn’t mean everyone else can safely assume they’ll escape this much-hated tax.
“Analysis from Tax Policy Associates indicated that by April 2027, 20% of pensioner households would have an IHT bill if the couple were to die at that point. It means far more will need to realistically consider whether they need to take steps to control a potential bill, including making sensible gifts to family during their lifetime.
“Older people will also have one eye on the change next April, when unspent defined contribution pensions will be subject to IHT. HMRC expects this to drag another 10,500 estates into the inheritance tax net that year, hike the amount of tax paid by 38,500 estates and increase the tax due by £34,000 each on average. It will make IHT planning even more of a priority.”
How does IHT work?
IHT is a tax on the money, property and possessions someone leaves behind when they die.
In most cases, there is no IHT on the first £325,000 of an estate. This is called the nil-rate band. If someone leaves their home to children or grandchildren, they may get an additional £175,000 allowance, taking the potential tax-free threshold to £500,000.
Anything above the available threshold is normally taxed at 40%. For example, if an estate is worth £600,000 and someone has a £500,000 tax-free allowance, IHT would generally be charged at 40% on the remaining £100,000 – a £40,000 bill.
There are important exemptions and reliefs. Assets left to a spouse or civil partner are generally exempt, and unused allowances can usually be transferred to the surviving spouse or civil partner, potentially giving a couple a total allowance of up to £1 million. Certain business and agricultural assets can also qualify for relief. The tax is normally paid from the estate before assets are passed to beneficiaries.
Including unused pension funds in IHT calculations from April 2027
From April next year, unused pension funds will be included in the estate’s calculations of IHT due. The government has predicted this change – mainly affecting those saving in defined contribution pensions – will mean that in 2027/28 around 49,000 estates will either then become liable to pay IHT when previously they weren’t or will have to pay a higher amount of IHT than they otherwise would.
The new rules are expected to create administration nightmares, more complexity and more cost for grieving families, just when they are at their most vulnerable.
AJ Bell, alongside the wider pensions and financial advice industry, has consistently argued that there are simpler, clearer, and fairer ways for the government to meet its policy and revenue-raising objectives without creating this level of complexity and distress for grieving families. As the April 2027 deadline approaches, the scale of the administrative burden these changes will create is becoming impossible to ignore.
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