Deep freeze in IHT nil rate band since 2009 cost families £62,000

The figures rises to £157,000 for estates with a London property, interactive investor research finds.

The deep freeze on the main inheritance tax (IHT) threshold since 2009 has pushed more estates into the tax net, costing bereaved families almost £62,000, on average, new research by interactive investor finds.

The IHT liability has risen to £157,000 and £106,000 for estates with a property based in London and the South East, on average, because of surging house prices, which have been greatest in those regions over the 14-year period.

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Instead of being uprated with inflation, the IHT-free threshold, also referred to as the nil-rate band, has remained at £325,000 since 2009 and will remain frozen at that level until at least 2028.

Meanwhile, growth in house prices, investments and savings (which are among the key assets factor in when calculating IHT liability) over the 14-year period means that even modest estates could be subject to IHT.

Alice Guy, Head of Pensions & Savings, interactive investor points out that it is  important to get advice and make a will to minimise your IHT bill, with some useful insights below, alongside ii’s Senior Personal Finance Analyst, Myron Jobson.

Our calculations

interactive investor’s calculations are based on growth in the price of the average property as recorded by the Office for National Statistics (ONS) from March 2009 to the end of March 2023. ii also factored in growth on an £50,000 investment portfolio that mirrored the return of the FTSE All-Share index and growth on £20,000 in cash savings, using the one-month LIBOR rate as a proxy, over the same period.

The average UK property has risen by 86% from £154,452 to £285,009 according to ONS figures.

The FTSE All-Share index returned just under 245% from March 2009 to the end of March 2023 turning £50,000 into £172,400, while growth in cash savings, as measured by the one-month LIBOR rate (just over 9%), turned £20,000 into £21,820.

When the value of all three assets is combined, the estate was worth £224,452 back in March 2009 - which falls within the IHT nil rate band (up to £325,000). This has risen to £479,229by the end of March 2023 with IHT liability totalling£61,692

Growth in IHT liability from March 2009 to end of March 2023

Source: interactive investor

Regional differences 

There are significant regional disparities when it comes to IHT liability because the extent of house price growth is not the same across all regions between March 2009 and end of March 2023.

For regions in England, London and the South East have the highest IHT liability on average (£157,018 and £105,505 respectively), followed by the East (£88,447).

Relatively modest house price growth in the North East means that estates with a property based in the region remain within the IHT nil-rate band.

Among the four nations, estates based in England have a greater IHT liability - £69,365 versus £33,358 for Wales, £21,639 for Scotland and £16,490 for Northern Ireland.

IHT payable by region for average homeowner

Source: interactive investor

Residence nil rate band

The residence nil rate band (RNRB), which was introduced in April 2017, can be claimed where the family home is inherited by children or other direct descendants. The maximum RNRB is currently £175,000 and this amount is fixed until April 2028.

The RNRB can be used of reduce IHT liability but is only available to when a property included in the deceased’s estate is left to the aforementioned direct descendants. 

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Inheritance tax has quickly shifted away from being a tax on the wealthy, as originally intended, to one paid by more modest estates thanks to runaway house prices and solid investment returns over the long term.

“IHT thresholds have remain unchanged since 2009. If uprated with inflation, the IHT nil rate band of £325,000 would have risen to just under £484,000. In other words, the deep freeze in the IHT thresholds has cost families £159,000 since 2009.

“Residential property makes up the largest share of most estates and average house prices have risen by 85% per cent between 2009 and end of February 2023. Adding growth on investments and cash savings to the mix which push many beyond the tax-free threshold.

“IHT is a money spinner for the Treasury, generating £600 million for the government in April 2023 alone, which £100 higher than the same period a year earlier. The freezing of the nil rate and residence nil rate bands until at least April 2028, which means an increasing number of estates will be subject to death tax over time.

“While a forecasted dip in property prices could limit growth in the government’s IHT takings, the OBR expects IHT to raise £7.2 billion in the 2023/24 tax year rising to a massive £8.4 billion by 2027-28.

“While no one likes to think about their own mortality, it is important to have your finances in order before you shuffle off the mortal coil to ensure that the taxman doesn’t take more than his fair share.

“You can reduce IHT liability by making use of gifting allowances, trusts and pensions (which are normally free from IHT). It is worth consulting a qualified adviser to work out the value of your estate and how much tax you might be likely to owe.”

Alice Guy, Head of Pensions & Savings, interactive investor, says: “It’s important to get advice and make a will to minimise your IHT bill, because it’s possible to lose out on valuable tax reliefs.

“Everyone gets an IHT tax-free nil rate band of £325,000, and additionally a residence nil rate band of £175,000 if they own property and pass it to their children or grandchildren. Married couples can also transfer any unused nil rate band, effectively doubling their exemption. This means it’s possible for married homeowners to pass on up to £1 million free of inheritance tax.

“If you have a pension pot and a stocks and shares ISA, you could save inheritance tax by using your ISA first and leaving your pension invested. Pensions are free from IHT and also aren’t classed as an asset if the council assesses your wealth for care home fees, although they are counted as part of your income.

“Getting married can also be a good way to save tax as spouses can pass assets to each other free from IHT, whereas unmarried partners could end up with a tax bill.

“Making use of your annual exemptions can also be a great way to pass on wealth and avoid a big tax headache. You’re allowed to give up to £3,000 each year in total and you can also give gifts from your surplus income. You’ll need to keep records to prove the money came from income and was surplus to your needs.”

IHT basics

• The rate of IHT is normally 40% on the value of an estate above a threshold of £325,000.
• This threshold is frozen up to and including 2025-26. Any unused threshold may be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000.
• There is an additional transferrable main residence nil rate band of £175,000 available when a home is left to children or other direct descendants.
• You may qualify to pay inheritance tax at a reduced rate of 36% if you leave at least 10% of your net estate to charity.