The nil rate band for Inheritance tax (IHT) has remained frozen at £325,000 since 2009 and will continue to be until 2026. The band will next be up for review in 2026 by which time it could be around £500,000 if increased in line with inflation.
IHT receipts in 2009/10 were £2.38bn, but HMRC stats released last week show this has now risen to £6.1bn in 2021/22. This is an increase of 14% on the previous year (2021/22 was £5.35bn) which constitutes the largest single-year rise in IHT receipts since 2015/16.
The Office for Budget Responsibility (OBR) suggest receipts from this tax will grow further to £8.3bn by 2026.
Andrew Tully, technical director at Canada Life comments:
“The nil rate band for Inheritance Tax has been frozen for more than a decade and as a result is woefully lagging behind inflation. While IHT has historically been a tax of the very wealthy this is clearly no longer the case… this is now a concern for larger sections of society as the IHT tax net widens.
There has also been a higher volume of wealth transfers due to Covid – partly due to more deaths in the elderly population, but also as some people make outright gifts to help family during this difficult period.
There is a considerable amount of planning which can reduce IHT bills. These include setting up a trust, making full use of gift allowances which allow you to pass on money to family while reducing your estate, and making a will and leaving a legacy to charity.”
The connection to property prices
The average cost of UK property has significantly outstripped inflation at a time when the IHT nil rate band will have been frozen for at least 17 years by April 2026. The average cost of a UK property in June 2022 was £294,845 – the comparable figure for April 2009 was £154,716.
The residence nil rate band (RNRB) was introduced in 2017 and allows potentially a further £175,000 to be used against the main residence if left to a direct descendant. Estates over £2m will see the RNRB reduced. However, this doesn’t necessarily help all clients.
The graph below shows the strong correlation between increase in IHT receipts and rise in house prices. The introduction of RNRB in 2017 helped a little, but IHT receipts still remain on an upward trajectory.