Inheritance tax threshold capped until 2028

10,000 more families could end up paying inheritance tax

(Image credit: © Dan Kitwood/Getty Images)

published 17 November 2022

Chancellor Jeremy Hunt confirmed the threshold for inheritance tax (IHT) will be frozen for a further two years in his Autumn Statement today. The move is part of a string of tax freezes aimed at raising money for the government.

Sunak previously froze the threshold at £325,000 until April 2026 last spring when he was chancellor. Now Hunt has extended the freeze again, to April 2028.

This will drag more people into the inheritance tax net; analysis by accountancy firm RSM reveals 10,000 more families could end up paying IHT. The value of their estate will rise, however the threshold will remain the same meaning families will have to shell out a larger chunk of their money, especially as inflation in the UK hits a 41-year high of 11.1%.

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The £325,000 IHT threshold for individuals was set in 2009. By freezing it until 2028, the allowance will have remained the same for almost two decades.

“Freezing the threshold of inheritance tax for an additional two years will have a knock on effect for everybody - especially with the UK’s inflation levels hitting an all-time high this week,” says Tim Walford Fitzgerald, tax partner at accounting firm HW Fisher. More people will find themselves caught in the inheritance tax trap.”

According to the wealth manager Quilter, an extra £1bn in IHT could be paid from April 2026 to April 2028 if the chancellor goes ahead with the stealth tax raid next Thursday.

““With more people squeezed financially, we are likely to see a rise in ‘giving while living’ - lifetime gifting to loved ones, particularly to adult children who are struggling to get by in the cost of living crisis,” adds Naomi Neville, lifestyle and estates planning partner at Irwin Mitchell. “The extended freeze on thresholds means people will need to seek advice more than ever to protect their wealth and ensure it is passed on how they would like, without being caught by unforeseen taxes in the future.”

How much is IHT?

Inheritance tax is charged at 40% of a person’s estate above a tax-free allowance. A reduced rate of 36% is charged if the deceased leaves at least 10% of their assets to charity in their will.

The basic inheritance tax threshold – also called the nil-rate band – is £325,000. This means you can die and leave an estate worth less than this and the beneficiaries won’t have to pay a penny in inheritance tax.

You also don’t need to pay IHT if you leave your estate – or everything above the £325,000 threshold – to your spouse, civil partner, a charity or community amateur sports club.

In practice, many people leave their entire estate to their husband, wife or civil partner when they die. This means there is no IHT liability, and the partner also “inherits” the £325,000 allowance. When the partner dies, he or she has a joint £650,000 tax-free allowance.

Those with children or grandchildren that leave the family home to them benefit from a “residence nil-rate band”, which boosts the £325,000 allowance to £500,000. This means a couple could leave up to £1m IHT-free to their kids or grandkids.

Why is the government freezing the threshold?

The Treasury raises billions of pounds from IHT each year. Continuing to freeze the allowance will generate huge amounts of extra revenue, helping the government to raise the £58bn it currently needs to borrow to meet its spending commitments.

Myron Jobson, senior personal finance analyst at interactive investor, comments: “The government is desperately trying to find ways to plug the gaping black hole in public finances. Inheritance tax could be part of the solution for the government.

“The freezing of the nil-rate and residence nil-rate bands until at least April 2028 means the government’s IHT takings are likely to keep on rising.”

He calls the tax a “money-spinner” for the government, with £3.5bn collected between April and September 2022 – £400m higher than in the same period a year earlier.

If the £325,000 threshold had risen in line with CPI inflation since its inception in 2009, it would now be worth £464,643, according to the Bank of England’s inflation calculator. If it had been hiked in line with RPI, it would be worth £537,129.

Jason Hollands, managing director of the online investment and coaching service Bestinvest, says extending the current freeze on IHT thresholds would amount to a “significant wealth tax”. He adds: “Ever more people who would never have imagined being hit with death duties are finding that their parents or grandparents’ estates are becoming subject to these taxes, especially given the strong rise in property and share prices over recent decades.”