HMRC Inheritance Tax Clarification Sparks Middle-Income Fears

Key Points

• The Treasury has come out with a formal clarification on inheritance tax following concerns in Parliament that it would affect middle-income families.
• Liberal Democrat MP Alex Brewer from North East Hampshire raised the issue of the impact of inheritance tax with Chancellor John Healey on the wealth of those whose assets are heavily skewed towards residential property.
• On the Chancellor’s behalf, James Murray, Financial Secretary to the Treasury and Paymaster General, replied, stating that less than 5% of UK deaths in the tax year 2023-24 would have triggered an inheritance tax charge had they not passed away.
• When all the reliefs and nil-rate bands are taken into account, up to £500,000 can be passed on tax-free to a surviving spouse or civil partner, and £1 million if all the reliefs and nil-rate bands are combined.
• The Treasury has also argued that inheritance tax does not prevent people from paying for social care because it would only be paid after they are dead.
• There is no inheritance tax to pay on transferring assets to a spouse or civil partner.
• The announcement in the previous Budget by the late Chancellor Rachel Reeves announced that from April 2027, ‘unused’ pension pots and death benefits as specified in the regulations will be included in the value of the estate of a deceased person for inheritance tax purposes.
• Personal representatives will be responsible for reporting and paying any inheritance tax that may be due on notional pension property, as well as for repaying any money the pension property is owed, once the property vests.
• Generally, pension scheme administrators will not be subject to inheritance tax, unless they do not comply with a valid withholding or payment notice.
• The inheritance tax is expected to be worth £8.7 billion in 2025-26, or 0.7% of total tax income, and around £300 per household.
• The basic inheritance tax rate is still 40% above the £325,000 threshold, which is not due to be lifted until 2030-31, but which can be reduced to 36% when at least 10% of an estate goes to charity.

Westminster (Britain Today News) – September 03, 2026: HMRC has moved to reassure middle-income households over the reach of inheritance tax, after concerns were raised in Parliament that families whose wealth is tied up mainly in residential property could be unfairly caught by the levy, particularly where social care costs are also a factor.

What Prompted the Treasury’s Inheritance Tax Statement?

The clarification followed a written parliamentary question submitted by Alex Brewer, the Liberal Democrat MP for North East Hampshire, who asked ministers to set out how many estates had been liable for inheritance tax over the previous five years and what impact the tax was having on middle-income families. The Treasury’s response, published today, Thursday, September 3, sought to address those concerns directly, setting out both the current scope of the tax and the small proportion of estates that actually pay it.

Who Raised Concerns Over Inheritance Tax in Parliament?

Alex Brewer put the question directly to Chancellor John Healey, asking

“what assessment he has made of the impact of inheritance tax on middle-income households whose estates are primarily comprised of residential property, including the effect on their ability to fund social care costs; and what proportion of estates were liable for inheritance tax in each of the last five years.”

The question reflects a wider unease among some MPs that households whose assets are concentrated in a family home, rather than in cash or investments, could be disproportionately exposed to inheritance tax liabilities, particularly in areas where property values have risen sharply.

What Did James Murray Say on Behalf of the Chancellor?

Responding on the Chancellor’s behalf, James Murray, Financial Secretary to the Treasury and Paymaster General, said:

“Inheritance tax is only paid by a small number of estates. For the 2023-24 tax year, the most recent year available, fewer than 5% of UK deaths resulted in an inheritance tax charge.”

James Murray went on to explain the reliefs available to families, stating:

“No inheritance tax is due on any property, money, or other assets passed on to a spouse or civil partner; more widely, various nil-rate bands, exemptions, and reliefs exist, including a £325,000 nil-rate band and a residence nil-rate band of a further £175,000 for those passing on a qualifying residence on death to their direct descendants, such as children or grandchildren.”

He added a further point of clarification, stating:

“This means qualifying estates can pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can pass on up to £1 million without an inheritance tax liability.”

James Murray also addressed the social care question raised by Alex Brewer directly, telling Parliament that inheritance tax should not affect the ability of individuals to fund social care costs, as it is only paid on the estate of someone who has already died.

What Is Inheritance Tax and Who Has to Pay It?

Inheritance tax applies to the estate of a person who has died, which can include their property, money and possessions. According to HMRC guidance, no inheritance tax is typically payable if the value of the estate falls below the £325,000 threshold, or if everything above that threshold is left to a spouse, civil partner, a charity or a community amateur sports club. Even where an estate falls below the threshold, executors may still be required to report its value to HMRC. It is worth noting that inheritance tax is not paid by the beneficiaries directly out of their own income; rather, it is settled from the estate itself before assets are distributed.

What Are the Current Inheritance Tax Thresholds?

Inheritance tax operates through a series of thresholds, known as nil-rate bands, which determine how much of an estate can be passed on before any tax becomes due.

What Is the Standard Nil-Rate Band?

The standard nil-rate band is set at £325,000, and this figure has been frozen until 2030-31. Any portion of an estate above this threshold is potentially liable for inheritance tax at the standard rate, unless a relief or exemption applies. Where a person’s estate is below the threshold, any unused allowance can be transferred to their spouse or civil partner upon death, according to HMRC guidance, raising the survivor’s own threshold to as much as £650,000 when combined.

What Is the Residence Nil-Rate Band?

Alongside the standard threshold sits the residence nil-rate band, worth a further £175,000. This applies where a home is passed to children, including adopted, foster or stepchildren, or to grandchildren. Combined with the standard nil-rate band, this raises the effective threshold for a qualifying estate to £500,000, or up to £1 million for the estate of a surviving spouse or civil partner, once both partners’ allowances are taken into account.

Does Inheritance Tax Affect Funding for Social Care?

This was one of the central concerns raised by Alex Brewer in the original parliamentary question, given that many middle-income households hold the bulk of their wealth in residential property that may also need to fund later-life social care. James Murray addressed this point directly in the Treasury’s response, confirming that inheritance tax should not affect the ability of individuals to fund social care costs, since the tax is only paid on the estate of someone who has died, rather than being deducted from a living person’s assets while they require care.

How Many Estates in the UK Actually Pay Inheritance Tax?

According to the figures set out by James Murray, fewer than 5% of UK deaths resulted in an inheritance tax charge in the 2023-24 tax year, the most recent year for which data is available. This figure is intended to illustrate that, despite public concern, the substantial majority of estates in the UK fall below the combined thresholds and reliefs, and therefore do not incur any inheritance tax liability at all.

What Changes Are Coming to Inheritance Tax on Pensions From 2027?

A significant change to the inheritance tax regime is due to take effect from April 2027. In the former Chancellor Rachel Reeves’ first Budget, delivered in late 2024, it was announced that inherited unused pensions and death benefits will, from that date, be brought within the value of a deceased person’s estate for inheritance tax purposes. This marks a shift from the current system, under which most unused pension funds can typically be passed on outside of the inheritance tax calculation. In an update issued in May this year, the government confirmed further detail on how the new rules will operate in practice.

Who Will Be Liable for Paying Inheritance Tax on Pensions?

The government’s May update set out where responsibility for reporting and paying any resulting tax will sit. According to the guidance,

“Personal representatives will be responsible for reporting and liable for paying any Inheritance Tax due on notional pension property.”

The update also clarified the point at which beneficiaries themselves become liable, stating:

“From the point that any notional pension property is vested in a beneficiary, they become jointly and severally liable, with the personal representatives, for any Inheritance Tax attributable to that property.”

The position for pension scheme administrators and trustees was also addressed. The guidance states:

“In normal circumstances, neither pension scheme administrators nor trustees of registered pension schemes will be liable for any Inheritance Tax.”

However, it goes on to warn that this protection is not unconditional, noting that

“pension scheme administrators will become jointly and severally liable with the beneficiary and personal representative if they fail to action a valid withholding notice or payment notice.”

How Much Money Does Inheritance Tax Raise for the Treasury?

Figures from the Office for Budget Responsibility show that inheritance tax is forecast to generate £8.7 billion in the 2025-26 tax year. This represents 0.7% of all tax receipts collected by the Exchequer and is equivalent to 0.3% of national income, or roughly £300 per household across the country. The Office for Budget Responsibility defines inheritance tax as a charge on the total value of all assets within an individual’s estate at death, after any liabilities, exemptions and reliefs have been deducted, with assets left to a spouse, civil partner or charity generally exempt from the charge.
Explore More about Politics:
Andy Burnham Vows to Work With SNP Over ScotWind
Andy Burnham Blames Tory Record for Rising Debt Costs at First PMQs

Can Charitable Giving Reduce the Inheritance Tax Rate?

The standard inheritance tax rate is set at 40% on the value of an estate above the £325,000 threshold. However, this rate can be reduced to 36% where 10% or more of the estate’s net value above the threshold is left to a charitable cause. Combined with the transferable nil-rate bands available to spouses and civil partners, which can raise a couple’s joint threshold to as much as £650,000, plus the residence nil-rate band of £175,000, households have several routes available to reduce or eliminate an eventual inheritance tax liability, depending on how their estate is structured and to whom it is left.

What Happens Next?

For now, the Treasury’s position remains that inheritance tax continues to affect only a small minority of estates each year, and that existing nil-rate bands, exemptions and reliefs are sufficient to protect the majority of middle-income households from a liability. Nonetheless, with the pension changes due to take effect from April 2027 and property values continuing to rise in many parts of the country, the issue raised by Alex Brewer in Parliament is likely to remain a live one for MPs, HMRC and the Treasury in the months ahead.