The Freeze on Inheritance Tax – What Does This Mean?

Inheritance tax (IHT) in the UK has always been a controversial topic, with this fixed at 40% on all estates worth £325,000 or more and considered by many to be an illegitimate form of double taxation on the same income.

While there’s no sign that this levy will be abolished or significantly modified any time soon, however, the Tory government has recently announced that it will freeze the current threshold until 2028 at least.

In this article, we’ll take a closer look at this policy decision, while asking what this will mean for residents of the UK.

What has the government decided?

IHT is a levy applied to a deceased person’s estate prior to its distribution, including a broad range of assets such as cash, investments and real estate.

The rate of 40% is immediately applied to all estates with a cumulative value of £325,000 or more, with this threshold having been in place for nearly two decades now. The best inheritance tax books will all quote this rate as a result.

According to the government’s recent guidance, this threshold will also now remain unchanged until 2028 at the earliest, despite calls for it to be increased in recent times.

What does this mean for households?

These calls have become increasingly prevalent amid the recent housing boom, which has sent the average property price in the UK soaring to £292,000 in 2022 (from a value of just £157,000 in 2009).

In simple terms, this means that more people will need to pay IHT over the course of the next six years as the threshold of £325,000 remains unchanged, with the ownership of a single home (especially in London and the south) making you eligible to pay IHT from your estate in most instances.

This is already making a rising number of estates eligible to be hit with a 40% IHT levy, which in turn means that more families are required to take out probate and executors’ loans to foot such a bill.

A look at the headline numbers

The recent figures seem to support this assertion, with official figures from HM Revenue & Customs in late October revealing that cumulative IHT receipts since April 2022 are up by a whopping £3.5 billion.

This number has also been ramped up as a result of wider inflation, while the trend is expected to continue as the cost-of-living crisis in the UK is unlikely to abate until 2024 at the earliest.

At the same time, the total value of IHT bills is continuing to increase nationwide. For example, the average IHT bill was £165,000 in 2010, while only a small number of estates were hit by such a levy.

However, it has now nearly doubled to £215,000, while it’s expected to rise further to a peak value of £65,000 between now and 2028.

Because of these factors, many people will be disappointed by the government’s decision to freeze the IHT threshold through 2028, while there’s no guarantee that the notion will be reversed in six years’ time either.