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%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.”
What else was announced in the Autumn Statement?
The top rate of income tax was cut from £150,000 to £124,140 while the income tax personal allowance and national insurance thresholds were frozen.
He also announced a cut for the dividend allowance, from £2,000 to £1,000 net year and then to £500 from April 2024.
-
M&S and Tesco among those warning of a £7bn Budget hitSeventy-nine UK retailers have written to Chancellor Rachel Reeves about possible price rises and job cuts - here is what it means
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Paragon raises rate on one-year fixed cash ISA to 5.75%Paragon Bank ups its one-year fixed cash ISA rate to 5.75% - is it enough to top the table?
