The number of families losing access to a key inheritance tax allowance is expected to rise significantly by the end of the decade. Analysis suggests that more than 16,000 estates could be valued above £2 million by the 2030–31 tax year, the point at which the residence nil rate band begins to be reduced. Recent figures from HM Revenue & Customs indicate that 3,620 estates were affected by the rule in 2022–23, the latest year for which data are available.
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The residence nil rate band allows individuals to pass on an additional £175,000 of their estate free from inheritance tax when leaving a main residence to direct descendants. However, this allowance is gradually withdrawn once an estate exceeds £2 million in value, disappearing entirely when the estate reaches £2.35 million. For married couples or civil partners who can combine their allowances, the threshold for losing the relief completely rises to around £2.7 million.
Rising property values and forthcoming changes to pension taxation are expected to increase the number of estates caught by the rule. From April 2027, pension savings will be included within the inheritance tax framework, a move announced in the Chancellor’s Budget. Analysts suggest this could push estates currently worth around £900,000 above the £2 million threshold once pensions are counted.
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Financial advisers have warned that the changes may require more careful estate planning. Strategies such as lifetime gifts, gradual spending of assets and the full use of existing tax allowances may help reduce potential liabilities. Government officials, however, maintain that the withdrawal of the residence nil rate band mainly affects the wealthiest estates, with forecasts indicating that fewer than 10 per cent of estates will pay inheritance tax by 2030–31.
