The first Budget by Chancellor Rachel Reeves extends the freeze on inheritance tax (IHT) thresholds to 2030.
With rising property prices, this freeze could mean more families face an IHT bill in the future. Given that property prices generally double every 10-15 years, more families will be caught by this freeze on IHT thresholds.
The Inheritance Tax Threshold Freeze
The UK’s nil-rate band, or IHT-free threshold, allows the first £325,000 of a person’s estate to pass free of tax. Set in 2009, this threshold has remained unchanged despite a significant increase in UK property values. The government’s decision to extend this freeze to 2030 ensures that more estates will eventually exceed the threshold as prices increase.
The residence nil-rate band (RNRB), introduced in 2017, provides an additional £175,000 allowance for primary residences left to direct descendants. When combined with the nil-rate band, this allows £500,000 to pass free of tax – and up to £1 million for married couples or civil partners. However, the freeze also applies here, meaning that families may find their estates exceed this threshold purely due to rising property values, not because of lifestyle changes or increased spending.
The role of Property price inflation
The freeze on thresholds, combined with property inflation, essentially increases IHT revenue for the government without directly altering tax rates. As a result, thousands more families are likely to be pulled into the inheritance tax system by 2030. This will significantly impact households where property is the main source of wealth, meaning more middle-income estates will face inheritance taxes traditionally levied on higher net-worth individuals.
Additionally, the rising value of estates due to property appreciation impacts families’ ability to pass wealth on to future generations. This “fiscal drag” means that more estates will fall into the taxable range, reducing the amount left to beneficiaries.
What this means for you
The extension of the IHT threshold freeze, in the context of rising property values, intensifies the impact of fiscal drag on UK estates. The Chancellor stated during her speech that only 6% of estates in the UK paid IHT last year. That percentage will almost certainly rise given today’s announcement.
This policy means that an increasing number of families, particularly those in high-value housing markets, will need to contend with inheritance tax liabilities they might not have anticipated. However, by taking proactive steps like lifetime gifting, using trusts, or reassessing pensions, families can mitigate the impact of fiscal drag and better plan for wealth transfer. Property owners need be aware of the impact of today’s news and act accordingly.
For many, these steps will be essential to preserving their legacy in the face of an evolving tax landscape. If you want to take steps to avoid being caught out by the freeze in IHT thresholds, our team can help.
Contact us to discuss our estate planning service by getting in touch below.