The number of families expected to lose a key inheritance tax relief is forecast to rise to around four times its current level by the end of the decade. The increase comes as more estates breach the £2 million threshold.

According to an analysis based on HM Revenue and Customs (HMRC) data, by 2030/31, more than 16,000 estates are expected to exceed £2 million in value, triggering the withdrawal of the £175,000 residence nil rate band. The forecasted number compares with 3,620 households affected by the withdrawal in 2022-23.

Chancellor Rachel Reeves has announced that unused pension savings will be brought within the inheritance tax framework from April 2027, alongside frozen tax thresholds and rising property prices, which appear to be steering the increase in the number of households.

Wealth manager Quilter, which conducted the research, estimates that estates currently worth £900,000 or more could be pushed above the £2 million limit once pension assets are included in calculations, reports GB News.

The current rules allow £325,000 to be passed on without inheritance tax. The allowance goes up to £500,000 when a main residence is left to direct descendants.

However, the extra £175,000 applies only where an estate is valued below £2 million.

The residence nil rate band is reduced by £1 for every £2 over the threshold for estates above that level and is fully withdrawn once the estate reaches £2.35 million for a single person.

Married couples and civil partners on the other hand can inherit unused allowances from their spouse, enabling them to pass on up to double the tax-free amount. For couples, the residence nil rate band is fully tapered away when combined estate values reach £2.7 million.

Shaun Moore, tax and financial planning expert at Quilter, said: “Many estates are likely to be hit by the double whammy of pension being brought into scope for inheritance tax and frozen tax allowances, and it is a tax that is going to increasingly impact estates, with the number caught out expected to rise.”

He added: “People will need to carefully manage their inheritance tax liability as a result, and while pensions used to be the last thing you would touch during your retirement when it came to drawdown, they may soon be the first you want to use.”

According to estimates by Quileter, approximately 6,4000 estates will exceed the £2 million threshold once pension assets are introduced within the inheritance tax regime. And projections from the Office for Budget Responsibility (OBR), indicate that annual inheritance tax receipts are expected to reach £14.5billion by 2030-31, more than double the £6.7 billion collected in 2022/23.

The OBR has also noted that the average pension pot held by those retired is £109,400.

David Little, tax expert at wealth manager Evelyn Partners, said: “Advance planning is essential when looking to reduce the impact of inheritance tax, and making lifetime gifts alongside the natural spending of wealth and using available allowances can all play an important role.”

He added: “In certain situations, deathbed gifting can also be valuable.”

*** Ensure our latest news headlines always appear at the top of your Google Search by making us a Preferred Source. Click here to activate or add us as Preferred Source in your Google search settings. ***