The current Inheritance Tax threshold was set in April 2009 and has remained unchanged since. In the 2021 Spring Budget, the Chancellor announced that this will be frozen for a further 5 years until 2026, by which point the Inheritance Tax threshold will have remained unchanged for 17 years.
The current threshold is £325,000. This is known as the Nil Rate Band allowance and, as the name suggests, is taxed at 0%. This means that the first £325,000 of your estate can be left tax free when you die. When a married couple leave everything to the survivor of them, the Nil Rate Band is unused because gifts between spouses are exempt from Inheritance Tax. As such the Nil Rate Band can be transferred to the survivor meaning that a married couple can combine their Nil Rate Band allowances.
Effects of inflation
Had the Inheritance Tax threshold kept up with inflation, it would now be almost £450,000, and likely even higher by 2026. Instead, however, it will remain frozen at £325,000, leaving a shortfall when compared to the rate of inflation of almost £125,000 per person, and £250,000 per married couple! As such, more and more estates will be subject to Inheritance Tax during the threshold freeze period.
Introduction of the Residence Nil Rate Band
In 2017 the additional Residence Nil Rate Band allowance was introduced. This is available where the deceased owned a property and left that property to their lineal descendants, i.e. children or grandchildren. The allowance was initially set at £100,000 for the 2017/18 tax year, increasing gradually each year until it reached £175,000. For a married couple, when combining both Nil Rate Band allowances and both Residence Nil Rate Band allowances, this gives a total threshold of £1,000,000.
The Residence Nil Rate Band was introduced in order to reflect the fact that the Nil Rate Band had not increased in line with property prices over the years, however this only provides further relief from Inheritance Tax for people who have children or grandchildren to leave their property to.
Once the Residence Nil Rate band reached £175,000, it was set to then increase in accordance with Consumer Prices Index from 2021 onwards. However, in addition to freezing the Nil Rate Band, the Chancellor announced that the Residence Nil Rate Band will also be frozen for a period of 5 years until 2026.
Tax on Middle England
In 2019/20, HMRC collected £5.2 billion in Inheritance Tax. This is only set to increase, with the frozen Nil Rate Band and Residence Nil Rate Band meaning that more and more estates will be subject to Inheritance Tax.
Historically Inheritance Tax was intended to apply only to the estates of the very wealthy, however as the threshold has remained unchanged for so long, more and more estates are being caught.
If you wish to discuss your Inheritance Tax position or Inheritance Tax planning, contact our Private Client Team can assist you.
This article was written by Jessica Newton, Solicitor in the Private Client Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2021.