The thresholds for Inheritance Tax (IHT) are set to remain frozen at their current levels until April 2028, a measure that could see a growing number of UK estates become liable for the 40% tax. The Nil-Rate Band (NRB), the portion of an estate on which no IHT is payable, will stay at £325,000. Similarly, the Residence Nil-Rate Band (RNRB), which applies when a main residence is passed to direct descendants, will remain at £175,000.
This means that the combined tax-free allowance for an individual can be up to £500,000, or up to £1 million for a married couple or civil partners, assuming the RNRB is fully utilised and transferred. The decision to extend the freeze, originally announced in the Autumn Budget 2021, means these thresholds will have been static for a significant period amidst rising property prices and general inflation, effectively dragging more estates into the IHT net.
The policy has been a consistent feature of recent fiscal statements, aiming to increase tax revenues for the Treasury. While the thresholds themselves have not been cut, their stagnation in a period of asset growth, particularly in the housing market, means that the real value of the allowance is eroding. This 'fiscal drag' effect means that individuals and families who previously would not have been impacted by IHT may now find themselves facing a substantial tax bill.
Critics of the extended freeze argue that it disproportionately affects middle-income families whose main asset is their home, rather than just the wealthiest estates. They contend that the original intention of the IHT was to tax very large fortunes, but the frozen thresholds, coupled with property price inflation, are bringing more ordinary families into scope. This can lead to difficult decisions for beneficiaries, sometimes forcing the sale of inherited properties to cover the tax liability.
The Government's position has been to prioritise fiscal responsibility and ensure sustainable public finances. The Chancellor of the Exchequer has previously highlighted the need for difficult decisions to manage the national debt. However, opposition parties have often called for a review of IHT, with some suggesting reforms to make the system fairer or to raise thresholds in line with inflation.
For UK citizens, understanding these frozen thresholds is crucial for estate planning. Without careful consideration, families could face unexpected tax burdens. Utilising reliefs and exemptions, making gifts within permitted limits, and ensuring a valid will is in place are all essential steps to mitigate potential IHT liabilities. Financial advisors often recommend reviewing estate plans regularly, especially with such long-term freezes in place.