Frozen inheritance tax thresholds have slashed the potential nil rate band by over 400,000, making estate planning ever more essential, data from AJ Bell shows.
New analysis from the investment expert shows that families could have passed on £1.43 million free of inheritance tax if the nil rate band and residence nil rate band introduced in 2017 had been uprated by successive governments since 2010.
Despite the introduction of the residence nil rate band, the total IHT free limit of £1 million will still be lower than if previous Chancellor George Osborne and his successors had made no changes other than inflation-linking the transferable nil rate band set by Gordon Brown, according to AJ Bell.
The announcement by Chancellor Jeremy Hunt in his Autumn statement to extend the freeze until 2028 means the threshold won’t be increased for almost two decades, while house prices continue to rise with the average property price in the UK jumping from £156,000 in 2009 to £295,000 in January 2023.
Laura Suter, head of personal finance at AJ Bell, said: “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 Office for Budget Responsibility expects it to generate almost £7 billion a year over the next six tax years.”
Suter said it is crucial for people to maximise their allowances and gifting rules to reduce the size of their estate.
Suter added: “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.”
Source: AJ Bell. IHT 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.
