How frozen thresholds could affect your inheritance tax liabilities

Inheritance Tax

Xeinadin Group



Share this article:

Rumours that the Chancellor of the Exchequer’s Autumn Statement would include big cuts to Inheritance Tax (IHT) failed to materialise. In fact, the last time major policy changes were made to IHT was back when now-PM Rishi Sunak was still Chancellor in spring 2021.

That was when IHT thresholds were frozen at their current levels. IHT thresholds set the total value a person’s estate has to reach before it is liable to be taxed upon their death. The main threshold, known as the nil-rate band, is fixed at £325,000 until April 2028. 

There is also a residence nil-rate band, which raises the threshold to £500,000 if you leave your main home to children or grandchildren. No IHT is due regardless of the value of an estate if it is left to a spouse or civil partner, or to a charitable organisation or amateur community sports club.

Frozen thresholds are sometimes referred to as ‘stealth taxes’ because they offer governments a way of raising tax receipts without having to take the politically unpopular step of actually raising taxes. Freezing means the thresholds don’t rise in line with inflation, but people’s incomes and assets do. Over the course of five years, inflation alone means more people will have crossed the £325,000 threshold by the time they die, and have more of their assets liable for IHT.

The impact is considerable. HMRC estimates that 50,000 extra thresholds will go above the nil-rate threshold by April 2028, and 280,000 will face higher liabilities. The Institute of Fiscal Studies calculates that government revenues from IHT will double over the next 10 years. 

Time to act

IHT attracts a lot of controversy because the rate is so high. People instinctively baulk at the idea of paying 40% of their accumulated life’s worth to the public purse when they die, rather than passing it on to their children or other beneficiaries. On the other hand, only around 4% of deaths currently result in IHT being owed at all, although that is also set to rise as a result of the frozen thresholds.

Arguably the most important thing to take away from the threshold freeze and its impact on inheritance is the value of forward-thinking in estate planning. None of us know when our time will come, of course, and it’s not something most like to think about. But not considering the impact of IHT well in advance could leave your heirs facing a hefty and perhaps unexpected bill. Just because your assets don’t cross the threshold now doesn’t mean they won’t in just a few years.

The first step is understanding how IHT relates to your circumstances. For example, if you are married or in a civil partnership, the nil-rate band effectively doubles to £700,000 because you pass on your allowance to a spouse or civil partner when you die, along with your estate itself is exempt from IHT. With the residential nil-rate band, this doubles to £1 million.

So you may have further to go before your estate becomes liable for IHT than you would expect. On the other hand, if you are still earning and are already in a strong financial position, those thresholds could creep up on you faster than you might think.

If unsure, the best advice is to speak to a specialist advisor to get your estate valued and make a forecast of its future growth. Once you have that clear, you can start planning for how you’d like to organise your estate, when the time comes.

Speak to our Probate team today to find out more


They are focussed on creating a future-focused and relationship-driven culture, that keeps its promises to you, our team members, and partners.