The inheritance tax bill for average earners is now £200,000 How much will your estate owe?

The "double whammy" of inheritance tax changes means that not only the very wealthy but even those with average UK wages may have to pay taxes

Even families with modest owners may wind up with hefty bills due to inheritance tax (IHT), despite the fact that it is often portrayed as a tax on the wealthy.

Even those with average salaries may face tax bills totaling hundreds of thousands of pounds due to current IHT regulations, according to research by Interactive Investor.

Due to the ongoing freeze of nil-rate bands and plans to include pensions in IHT calculations, even the estates of low and average earners may be subject to IHT charges.

According to Myron Jobson, senior personal finance analyst at Interactive Investor, "IHT is beginning to affect everyone, not just the wealthy as was first thought.

"The harsh truth is that minors with modest assets are becoming more and more entangled in the growing IHT net.

How IHT might be triggered by a salary of £35,000.

According to an analysis by Interactive Investors, the estimated IHT bill at age 68 for a 45-year-old making the national average of 35,000 is 194,529.

This is due to the main nil-rate band of 325,000 being frozen indefinitely, plans to include pensions in IHT calculations starting in April 2027, and the possibility of increases in pension and home prices.

The estimate is based on the assumption that the individual has a pension of 80,000, which is the average for their age according to ONS data, and a home valued at the national average of 268,319 (based on Land Registry figures).

Additionally, it accounts for pension contributions of 8% of salary, which is the minimum required for automatic enrollment, as well as a 2% yearly increase in wages and property values, which would eventually increase pension contributions. Additionally, it presumes that the 325,000 nil-rate band will be accessible upon their passing.

When a 45-year-old makes £50,000, their estimated IHT liability at age 68 is 218,992, and for those making £80,000, it is 267,914.

Even those who make less money may discover that they leave their loved ones with an IHT bill.

Upon reaching state pension age, the same 45-year-old making £20,000 per year would be expected to owe £170,069 in IHT, which is expected to increase to £68 between April 2044 and April 2046.

The potential IHT costs to your estate from your salary.

Interactive Investor is the source.

It is assumed that a 45-year-old with 80,000 in pension funds (the average for their age based on ONS data) will contribute 8% of their salary until they are 68. Their home is average in price (based on current Land Registry data) and appreciates by 2% annually. Additionally, it presumes that upon their passing, the 325,000 nil-rate band will be accessible.

What is the typical IHT bill amount?

Revenues from inheritance taxes are already at all-time highs, and more families are anticipated to be affected in the years to come.

As a result of the current regulations, nearly 153,000 estates may be subject to new or increased IHT liability by 2030, including 31,200 additional estates that will be liable for IHT, according to a Freedom of Information (FOI) request made by Interactive Investor to the Office for Budget Responsibility (OBR).

It is anticipated that the percentage of estates subject to IHT will increase from 5 percent in 2023 - 2024 to 9 percent in 2029 - 2030, with the average tax bill per estate staying relatively constant.

According to OBR estimates, the average IHT liability for the 2027 - 2028 tax year is expected to be 169,000, rising by about 34,000 when pension assets are factored into the estate's valuation.

In reaction to the changes in the IHT on pensions, over half (54 percent) of UK adults intend to modify their estate or retirement plans, according to a recent interactive investor survey.

Unused pension savings and some pension death benefits will be included in the value of estates for IHT purposes starting on April 6, 2027, according to the Chancellor's October Budget.

More estates will be subject to IHT as a result of this modification and the continuous freezing of the residence nil-rate band (set at 175,000 since April 2020) and the main nil-rate band (frozen at 325,000 since April 2009).

How to reduce your IHT bill by using gifts.

Making regular gifts using IHT gifting exemptions instead of a one-time lump sum could save families up to 37,000 in taxes, according to a recent Interactive Investor analysis.

According to Jobson, "Using your 3,000 annual gifting allowance on a regular basis 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. It's important to consider your own financial needs in later life; you don't want to be in financial straits in retirement, whether that means giving loved ones more gifts or looking into other options.