The prime minister froze the IHT thresholds until 2025-26 when he was Chancellor and is now understood to be pushing ahead with his stealth tax raid to plug a £50bn budget black hole. Currently, families have to pay 40% inheritance tax on the value of an estate over £325,000. This will lead to grieving families paying a collective £1bn more in IHT in 2026-27 and 2027-28, according to calculations by wealth manager Quilter. This is due to a phenomenon known as “fiscal backlash”, where inflation and rising earnings push more taxpayers into higher tax brackets. It means the average IHT bill will also jump from £216,000 in 2019-20 to £297,793 in 2025-26 and then again to £336,605 for 2027-28 due to the effects of the frozen limits combined with rising investment inflation , according to Club. Alex Davies, of the Wealth Club, said: “Freezing the inheritance tax threshold for two extra years – until 2027-28 – is a wicked tax increase. It won’t appear on a list of tax increases, but it won’t be long before its impact is felt on unsuspecting families. And it’s not just going to be the super-rich. It will be the thousands of working families who will be caught in the crosshairs of high property prices and frozen IHT benefits.’ Separate calculations by tax firm RSM show that 10,000 more families could end up paying IHT over those two years as a result of the thresholds not rising with inflation. The nil rate band – the amount that can be rolled over before IHT is paid on the estate – has been stuck at £325,000 since April 2009, so extending the freeze until 2027-28 means the nil rate band will remain unchanged for nearly 20 years, despite rising house prices pushing many estates over the limit. Tim Stovold, of accountancy firm Moore Kingston Smith, said the relief available had not kept pace with growth in a family’s main asset, their home. Average house prices rose by £140,000 between 2009 and 2022, according to figures from the Land Registry. The residential nil rate band, introduced in 2017 to take account of house prices increasing the size of estates, has also been frozen at £175,000. Quilter estimates that, if increased in line with inflation, the nil rate threshold would be worth £351,520 in 2027-28, while the nil rate housing threshold would be worth £189,280, meaning fewer families would be caught paying IHT because a average couple would have £80,000 extra in benefits. In 2009 only 2.7% of estates paid death duties, but in recent years the figure has remained steady at around 4%. In 2019-20, the latest year for which data is available, 23,000 families paid death dues. Andrew Tully, of financial services provider Canada Life, said: “While IHT has historically been a tax on the very wealthy, this is clearly no longer the case. With most personal tax exemptions, including the basic rate and nil rate of residence frozen until at least April 2026, this is now a concern for larger sections of society as the IHT tax net widens.’ The revenue generated by the government from IHT has soared in recent years to a record £6.1bn for 2021-22, up 14% year-on-year, and the latest statistics show that this year IHT collections could to break records again. Even with house prices expected to fall, Shaun Moore, of Quilter, said he did not expect this to affect the number of estates caught in the IHT net. “While house prices may soon fall due to the endless list of economic worries facing the UK, including inflation, energy prices and an unpredictable European war, this is unlikely to take the sting out of IHT bills for any period of time”. James Ward, of Kingsley Napley LLP, said: “IHT is seen by some as double taxation as people already pay income tax during their lifetime and is often described as one of the most hated taxes.” In a recent YouGov poll of 1,700 people carried out by the law firm, almost half (48%) believed IHT should be abolished altogether. A Treasury spokesman said: “We do not comment on speculation around tax changes.”
