Inheritance tax raid to cost your family an extra £230,000
Inheritance tax has been charged at 40 per cent
GETTY
Families could face up to £234,000 in additional inheritance tax bills due to the extended freeze on tax thresholds, according to new figures.
The main inheritance tax exemption, known as the nil rate band, has remained static at £325,000 since 2009 and will now stay frozen until April 2030 following Rachel Reeves's recent Budget announcement.
This means the threshold will have remained unchanged for more than two decades, potentially costing families significantly more in death duties compared to if the limits had risen with inflation.
Currently, married couples can pass on a combined total of £1million tax-free if they leave a property to direct descendants, thanks to the residence nil rate band introduced in 2017.
However, AJ Bell's analysis shows that if the main nil rate band (allowed £650,000 to pass on tax-free prior to 2017) had simply kept pace with inflation, the overall inheritance tax threshold would actually be higher than this current arrangement.
Inheritance tax has been charged at 40 per centGETTY The nil rate band indexed to inflation would stand at almost £555,000 by 2029/30, meaning a couple could pass on an additional £110,000 tax-free. It means tax bills could be £44,000 higher per family as a result.
But if both the nil rate band and residence nil rate band were indexed to inflation the combined total would stand at nearly £1.6million, knocking up to £234,000 off IHT bills.
Charlene Young, pensions and savings expert at AJ Bell said: "Frozen tax thresholds punish taxpayers by stealth. When asset prices rise but thresholds fail to track inflation, the result is higher tax bills.
LATEST DEVELOPMENTS:
"Astonishingly, the main IHT free threshold won't have changed in over two decades by the time the freeze is lifted in 2030.
"Although a new exemption has been introduced since then - the residence nil rate band - these figures show it actually doesn't compensate for frozen thresholds."
The tax bill on a £2million estate will be £400,000 thanks to frozen thresholds. That would be reduced to £166,000 if the exemption for the combined assets of a married couple had been uprated.
The nil rate band indexed to inflation would stand at almost £555,000 by 2029/30,
PAThe situation becomes even more complex for estates worth over £2million, as the residence nil rate band is gradually tapered away.
The impact of frozen thresholds is set to worsen with new rules coming into effect from April 2027, which will bring unspent pensions within taxpayers' estates.
HMRC estimates suggest these changes will affect 4,300 new estates, expanding the reach of inheritance tax.
The Government maintains that only one in 20 estates currently pays inheritance tax, but official figures show revenue was already increasing before the latest Budget changes.
You may like
