Families face extra £170,000 inheritance tax bill because of tax threshold freeze

by | Jan 3, 2023

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Families could have passed on £1.43 million free of inheritance tax (IHT) had the government not frozen tax-free thresholds since coming to power as far back as 2010, new analysis from AJ Bell shows. 

Instead of raising the IHT-free threshold with inflation, the government will keep it frozen at a total of £1 million until 2028. Chancellor Jeremy Hunt announced the extended deepfreeze at the Autumn Statement.

The policy of freezing IHT thresholds since 2010 could cost families an extra £170,000 in death duties*. 

The figures show families would pay no IHT on assets up to £1.43 million by 2028 if the nil rate band, and residence nil rate band introduced in 2017, had been uprated by successive Tory Chancellors going back to George Osborne. 

 
 

And despite the introduction of the residence nil rate band from 2017, the total IHT free limit of £1 million will still be lower than if Osborne and his successors had made no changes other than inflation-linking the transferable nil rate band set by Gordon Brown.

IHT threshold in 2028Nil rate bandResidence nil rate bandTotal for couples
Actual IHT thresholds in 2028£325,000£175,000£1 million
If the government had done nothing except uprating with inflationsince 2010 £502,000N/A£1.004 million 
If the government had uprated the nil rate band and residence nil rate band with inflation£502,000£212,00£1.43 million

Source: AJ BellIHT nil rate band uprated 2010/11-2027/28 in line with the previous year’s inflation. Residence nil rate band uprated from April 2021, having been set at £175,000 from 2020. CPI used until 2021, after which the latest OBR inflation projection is assumed. Figures rounded to the nearest £1,000.

Laura Suter, head of personal finance at AJ Bell, comments:

 
 

“The deep freeze on inheritance tax thresholds until 2028 means they won’t be increased for almost two decades. During that time we’ve seen house prices soar – with the average property price in the UK rising from £156,000 in 2009, when the current nil-rate band was set, up to £295,000 today. This highlights how someone in a relatively modest home could easily hit the threshold with their property alone.

“Only one in 25 estates result in IHT being paid at the moment, but that will rise during the time the thresholds are frozen. Increasingly this impacts the moderately wealthy – as those with large estates are covered by other thresholds and allowances and can afford professional help to minimise their bill**.

“Death duties are a decent cash cow for the government, generating £2.38 billion in 2009-10 but rising to £6.1 billion last year. While falls in property prices are expected to limit growth in the next few years, the OBR expects it to generate almost £7 billion a year over the next six tax years. 

 
 

“It’s crucial for people to maximise their allowances and gifting rules to reduce the size of their estate, where possible. No-one should be giving money away that they may need later in life, but there are myriad tax breaks that people can utilise to avoid handing more of their money to the taxman.” 

IHT nil rate band

Prior to the 2010 General Election the IHT free threshold had increased steadily, rising from £250,000 in 2002 to £325,000 in 2009. 

 
 

In 2007 Gordon Brown also introduced the transferable nil rate band, effectively doubling the threshold for a married couple, and set out plans to continue raising the combined nil rate band for couples to £700,000 from 2010***:

However, the transferable nil rate band remains unchanged since it was set at £650,000 in 2009 and will now be frozen until at least April 2028 under plans announced last week by the Chancellor. 

Had the government done nothing other than uprate the pre-existing transferable nil rate band since 2010, the IHT free threshold for a couple would be £1,004,000 million by 2028. 

 
 

Residence nil rate band

Although the residence nil rate band, introduced in 2017, takes the total tax free allowance to £1m, it has also been frozen since it was phased in to £175,000 by 2020.  

AJ Bell’s analysis shows that had both the IHT nil rate band and residence nil rate band been uprated with inflation every year, the combined nil rate for IHT would be almost 50% higher at £1.43. 

 
 

The residence nil rate band also begins to taper down on estate worth more than £2 million. It is completely wiped out if the estate exceeds £2.35 million. Had the taper threshold been linked to inflation, it would be lifted to £2.6 million by 2028.

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