Recent reports suggesting that the UK Conservative Party is considering a pledge to abolish inheritance tax have generated considerable debate. However, these are preliminary discussions, not a change in law. No bill has been introduced, and the existing tax regime remains in effect. This distinction is crucial for families engaged in estate planning, pension decisions, or gift-giving.
Political Considerations, Not Policy
The Conservative leader, Kemi Badenoch, has expressed interest in reducing or eliminating inheritance tax, and her economic team has been tasked with exploring affordable options. Shadow Chancellor Andrew Griffith has also criticized the tax as distortive. Yet, no specific proposal has been finalized, costed, or scheduled. Any potential abolition would require a Conservative election victory, a detailed plan for replacing the £8.4 billion raised in 2024-25 (less than 1% of total tax receipts), and legislation passed through Parliament.
For investors in gilts and sterling, the funding mechanism is more significant than the political rhetoric. A fully offset abolition would redistribute the tax burden without increasing government borrowing. An unfunded pledge, conversely, would add to future financing needs. With no costed plan, there is no basis for anticipating immediate changes to UK debt issuance.
Current Inheritance Tax Rules
Under existing law, the standard inheritance tax rate is 40% on the taxable portion of an estate above the nil-rate band of £325,000. The residence nil-rate band adds an additional £175,000 for homes passed to direct descendants, potentially allowing individuals to pass up to £500,000 tax-free. Couples can combine their allowances, enabling transfers of up to £1 million.
These thresholds are fixed until at least April 2030 for the residence band and April 2031 for the basic band. With asset values rising, more estates may become liable for inheritance tax even without a rate increase.
The Enacted Pension Change
Starting April 6, 2027, most unused pension funds and death benefits will be included in the deceased's estate for inheritance tax purposes. This change, introduced via the Finance Act 2026 (which received Royal Assent on March 18), will affect deaths on or after that date. Death-in-service benefits and certain exempt benefits are excluded.
HM Revenue & Customs estimates that in 2027-28, approximately 10,500 estates will become liable for inheritance tax due to this change, and another 38,500 will pay more, with an average increase of £34,000. These figures are static estimates; actual numbers may vary as families adjust their planning.
Planning Implications
This enacted pension rule is a concrete factor for pension holders. While a future government could repeal it, relying on an opposition proposal is risky. Individuals should review their wills and consider the inheritance tax implications of pensions, gifts, and trusts under current law. The seven-year rule for gifts and the interaction with income tax and capital gains tax remain critical.
Until a costed, official Conservative policy emerges, the 40% inheritance tax rate and the 2027 pension inclusion are the only rules investors can rely on for planning.
