Inheritance Tax – Threshold Freeze & Pensions

The freeze on inheritance tax (IHT) thresholds could cost families £234,000 over the total duration of the potential two-decade long nil rate band (NRB) freeze, up to the 2030 end date, and the introduction of unspent pensions into the IHT bracket.

The NRB has been frozen at £325,000 since 2009 and was recently frozen again at the Autumn Budget, with Chancellor, Rachel Reeves, extending the end date to April 2030.

While the RNRB (Residents Nil Rate Band), which was introduced in 2017, means a married couple can leave a combined £1m tax-free, if they leave a property to their direct descendants, AJ Bell found that the overall IHT threshold would be higher if the main NRB had been linked to inflation and the residence NRB was never introduced.

If the NRB was indexed to inflation, AJ Bell calculated it would stand at nearly £555,000 by 2029/30, meaning a couple could pass on an additional £110,000 tax free.

However, if both the NRB and RNRB were both indexed to inflation, the combined total would be almost £1.6m, knocking up to £234,000 off IHT bills.

Frozen tax thresholds punish taxpayers by stealth. When asset prices rise but thresholds fail to track inflation, the result is higher tax bills. Astonishingly, the main IHT free threshold won’t have changed in over two decades by the time the freeze is lifted in 2030.

The tax bill on a £2m estate will be £400,000 thanks to frozen thresholds. For larger estates over £2m the story is even worse, since the residence NRB is gradually tapered away for households with cash and assets to pass on above this level. This is likely to be exacerbated by the inclusion of unspent pensions within taxpayer’s estates from April 2027.

HMRC’s own estimates show the taxman will be able to take a tax slice from an additional 4,300 families, with the freeze on thresholds, and the inclusion of unspent pensions into the IHT bracket.

Generation Financial Planning urge families to seek advice surrounding their estate planning needs, more so now, than ever.  We provide Inheritance Tax Stratergies that can benefit most.