Average single homeowner in England with moderate pension savings to suffer £107k inheritance tax under new rules

21 November 2024

New calculations from Quilter, the wealth manager and financial adviser, has found that a single homeowner in England with an average priced home (£308,782) and enough savings to enjoy a moderate retirement (£459,000) will be liable to £107,000 inheritance tax (IHT) from 2027 following changes announced in the budget.

Previous calculations by Quilter showed a single person looking to achieve what is defined as a moderate retirement lifestyle by the PLSA, needed to build up a pension pot of approximately £459,000 to pay for their retirement until death.

A moderate lifestyle includes being able to afford £74 a week on food (including food away from the home) as well as two weeks in Europe and a long weekend in the UK every year.

At the recent budget the Chancellor announced a further freeze to the nil-rate band (NRB) at £325,000 and the residence nil-rate band (RNRB) at £175,000 until the end of the 2029-2030 tax year. This means that as property values and other assets increase, more estates will become liable for inheritance tax. Additionally, from 2027, pensions will be included in the inheritance tax calculations, increasing tax liabilities for many estates.

A single person in London with an average priced home of £525,586 with the same amount in their pension will have an IHT liability of £194,000 in 2027 compared to just £10,000 today.

Following the rule changes, those in Northern Ireland, Scotland and Wales previously would have paid no inheritance tax due to the lower average house prices in the region. Now if they have built up retirement savings to pay for a moderate retirement which are unused their estate will now pay £59,821, £62,818 or £70,300 respectively.

Across the rest of the England, the only region where single people will have a bill of £52,000 or less is in the North East.

However, according to property website Rightmove asking prices will increase across the UK by 4% across just 2025 causing these bills to rise further.

Single and childless homeowners can only shield £325,000 from IHT because the £175,000 residence nil-rate band is only available to those leaving their main property to their direct descendants. Couples with children can combine their allowances, allowing a widow or widower to pass on up to £1m tax-free.

Roddy Munro, tax and pensions specialist at Quilter:

"The double whammy of a frozen nil rate band and the inclusion of pensions in your estate means many more people with average-priced properties and modest pension wealth will become liable for a tax originally intended for the very wealthy. These inflated estates along with the variance in house prices across the UK means IHT becomes even more of a post code lottery.

“Pensions are primarily a retirement vehicle, meant to be depleted over time. Ideally, you would pass away just as your pension pot empties, but this is rarely the case. The new regime means those who saved significant sums into their pensions, assuming they would be free of inheritance tax, now face new challenges. Similarly, those who sadly pass away early on in their retirement will have less to pass on to their beneficiaries.

“However, there are steps you can take to mitigate your IHT bills. Simple actions like early gifting can reduce your taxable estate if you live seven years beyond the gift date. More flexible options, such as onshore bonds wrapped in trust, also play a crucial role. These bonds benefit from favourable tax treatment.

“By placing the bond in a trust, you can remove its value from your estate, potentially lowering your inheritance tax bill if you survive seven years after the transfer. Additionally, trusts offer control and flexibility over how and when assets are distributed to beneficiaries, ensuring that your family is supported according to your wishes. However, its crucial to seek advice to seek out the best possible option for your specific financial position.”