Average earners now face £200,000 inheritance tax bill - how much will your estate owe?

Inheritance tax (IHT) may be portrayed as a tax on the wealthy but there are warnings that even the families of modest owners could end up with large bills.

Research by interactive investor suggests that current IHT rules are on course to land the families of even those earning average salaries with tax bills worth hundreds of thousands of pounds.

It comes as plans to include pensions in IHT calculations, alongside the ongoing freeze in nil-rate bands, means even the estates of low and average earners could face IHT charges.

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Myron Jobson, senior personal finance analyst at interactive investor, said: “IHT is increasingly becoming a tax for all, not just the wealthy as it was originally portrayed.

"The stark reality is that the IHT net is expanding, increasingly ensnaring people with modest assets.”

How a £35,000 salary could trigger IHT

For a 45-year-old earning the national average of £35,000, the projected IHT bill at age 68 is £194,529, according to interactive investor’s analysis.

This is because of potential growth in pension and house prices, plans to include pensions in IHT calculations from April 2027, and the ongoing freeze of the main nil-rate band of £325,000.

The estimate assumes owning a home valued at the national average of £268,319 (based on Land Registry figures) and with £80,000 in a pension (the average for their age according to ONS data).

It also takes account of pension contributions of 8% of salary (the minimum for automatic enrolment) and a 2% annual increase in property value and wages, which would also boost pension contributions over time. It also assumes that the £325,000 nil-rate band is available on their death.

For the same 45-year-old earning £50,000 the projected IHT liability at age 68 rises to £218,992 and to £267,914 for those with a salary of £80,000.

Even lower earners could find they leave their loved ones with an IHT bill.

The same 45-year-old earning £20,000 annually would face an estimated IHT liability of £170,069 by the time they reach state pension age, set to rise to 68 between April 2044 and April 2046.

What your salary could cost your estate in IHT

Source: interactive investor. Assumptions: 45-year-old with £80,000 in their pension (the average for their age according to ONS figures), contributing 8% of salary until age 68. They own an average-priced house (based on current Land Registry figures) appreciating at 2% per year. It also assumes that the £325,000 nil-rate band is available on their death.

How much is the average IHT bill

Inheritance tax receipts are already at record highs and increasing numbers of families are expected to be hit in the coming years.

A Freedom of Information (FOI) request by interactive investor to the Office for Budget Responsibility (OBR) revealed almost 153,000 estates could face new or increased IHT liability by 2030 as a result of the current rules – including 31,200 additional estates that will become liable for IHT.

The proportion of estates subject to IHT is projected to rise from 5.2% in 2023/24 to 9.5% in 2029/30, while the average tax bill per estate is expected to remain broadly unchanged.

In the 2027/28 tax year, the average IHT liability is projected to be £169,000 – increasing by approximately £34,000 when pension assets are included in the value of the estate, according to OBR estimates.

A recent interactive investor survey found more than half (54%) of UK adults plan to adjust their retirement or estate planning in response to the IHT changes on pensions.

In the October Budget, the Chancellor announced plans to include unused pension savings and certain pension death benefits in the value of estates for IHT purposes from 6 April 2027.

This change, combined with the ongoing freeze of the main nil-rate band (frozen at £325,000 since April 2009) and the residence nil-rate band (set at £175,000 since April 2020), means more estates will become liable for IHT.

How to use gifting to cut your IHT bill

Recent analysis by interactive investor shows how making regular gifts using IHT gifting exemptions – rather than a one-off lump sum – could save families up to £37,000 in tax.

• Making regular gifts using annual gifting rules means you won’t trigger an IHT bill, even if you die within seven years
• Regularly using your £3,000 annual gifting allowance could save £7,200 in IHT
• Giving gifts from surplus income could reduce the IHT bill on your estate by £26,800, assuming £10,000 is gifted annually over seven years
• Making small gifts of £250 to six people could save £3,000 in tax
• Married couples and civil partners can each use the available IHT-exempt gifting allowances, effectively doubling the potential tax-free gifts each year

Jobson added: “Understanding the key changes to the IHT regime is vital for anyone looking to pass on wealth efficiently. Whether this means gifting more to loved ones or exploring other strategies, it’s crucial not to overlook your own financial needs in later life – you don’t want to find yourself financially stretched in retirement.”