Experts warn about next "dangerous" inheritance tax nightmare: "Slow-moving tax trap"

FINANCIAL experts have warned against what they describe as the next inheritance tax nightmare – fiscal drag.

With the planned raid on pensions, frozen thresholds now matter more than you think, experts said.

Much of the recent attention has focused on the government’s decision to bring pensions into the inheritance tax net. 

But there’s another, quieter problem set to affect many families, especially when their pensions are included.

Fiscal drag happens when tax thresholds are frozen while incomes, property values, and asset prices continue to rise. 

Even without tax rates going up, more and more people are pulled into paying tax — or paying at higher levels.

The nil‑rate band, the amount you can pass on tax‑free, has been stuck at £325,000 since 2009.

The residence nil‑rate band, introduced in 2017, softened the blow, but this has also been frozen at £175,000.

Together, that’s a £500,000 allowance per person — but now frozen until at least 2029‑30.

With inflation running at 3.8%, by 2030, an estate worth around £415,000 today will be dragged over the frozen £500,000 threshold. 

Families who never thought inheritance would apply could suddenly find themselves with unexpected bills.

Antonia Medlicott, Founder at Investing Insiders, said: "Fiscal drag is a slow-moving tax trap, which makes it particularly dangerous. Thanks to frozen thresholds, middle-income families – who until recently could safely assume they clear of risk – are quietly being pushed into the inheritance tax danger zone without even realising it. 

"That's turning what was once a tax on the wealthy into a broader issue that is going to hit far more people than are prepared for it."

Scott Gallacher, Director at Leicester-based Rowley Turton, described fiscal drag as a “nightmare”.

He added: "Freezing the nil-rate and residence nil-rate bands until 2030 is effectively a 20% real-terms cut in the inheritance tax threshold. Combined with pensions being dragged into inheritance tax (IHT), this will catch many more ordinary families than most people realise. 

"So, yes, it could be the next IHT nightmare. It’s something I’m already seeing daily: my financial planning projections show many clients will simply be maintaining the real value of their estates as they draw on pensions to fund retirement. 

“Yet the absolute figures still show growth — and that creates a potential future IHT problem, even for families currently comfortably below the £1m married couple threshold, particularly if thresholds remain frozen beyond 2030.”

Anita Wright, Chartered Financial Planner at Ribble Wealth Management, shared some advice on how to avoid the dangers.

She added: "IHT is often described as a stealth levy on families, but in reality it is one of the few taxes that can be significantly reduced — or even avoided — with early and thoughtful planning. 

"The real challenge today is that more households are being drawn into liability, not because they are exceptionally wealthy, but because the tax-free allowances have stood still while asset values have risen sharply. 

"With frozen IHT allowances, rising property values, larger portfolios, and pensions under review, the tax will inevitably catch more estates over time. What feels like a modest house or a carefully built retirement pot can, within a decade, become sufficient to trigger a 40% tax charge. 

“For many families, the first time they consider this is after death has occurred — by which point, options are limited. The direction of travel is clear: without action, more families will be caught. With planning, most can avoid becoming part of the statistics.”

Kundan Bhaduri, Entrepreneur and Landlord at London-based The Kushman Group, also shared what people need to consider.

He continued: "This fiscal drag is the nightmare hiding in plain sight while families sleepwalk toward financial devastation. The frozen £325,000 nil rate band, unchanged since Gordon Brown occupied Downing Street, has transformed IHT from a levy on genuine wealth into a systematic raid on middle class prudence.

"When combined with property appreciation and pension accumulation over decades of diligent saving, ordinary families now face tax bills that would have been unthinkable when these thresholds were set. Consider gifting strategies that use annual exemptions effectively, explore potentially exempt transfers for larger sums, and investigate whether trusts provide protection for family wealth.

“Property owners should particularly examine whether business property relief applies to any of their assets, while those with substantial pensions need urgent advice on nomination forms and withdrawal strategies that minimise tax exposure.”

Samuel Mather-Holgate, Independent Financial Adviser at Swindon-based Mather and Murray Financial, also called it a “stealth tax”.

He added: “The inheritance tax threshold has been £325,000 since 2010. Yes, really it hasn’t increased for 15 years and won’t increase until at least 2029. Imagine how much your shopping, or fuel has increased in 20 years. 

"The government will be charging IHT on a much higher percentage of estates now, compared to 2010, as house values and pension funds have grown in the last 20 years. Cross governments, it’s one of the sneakiest forms of stealth tax at their disposal and my goodness, they love using it.”

Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said: "Fiscal drag is the ultimate stealth tax as inflation is often felt in hindsight. In a world where the only answer seems to be more taxes, it's the easiest lever for the chancellor to pull as it doesn't generate the attention that a penny on alcohol or fuel duty does. 

“The higher rate of income tax threshold of £50,270 was last changed in April 2021. If that had been linked to inflation, it would be worth around £62,500 today. That's an additional tax of £2,446 by holding the threshold down.”