New inheritance tax grab will trap ‘10,000 more families’

Bereaved families will be forced to pay an additional £1billion in inheritance tax if Rishi Sunak extends the freeze on inheritance tax thresholds by two years, according to analysis by The Telegraph.

The Prime Minister has frozen IHT thresholds until 2025-26 when he was chancellor, and it is now understood he will continue his stealth tax raid to plug a £50billion fiscal black hole .

Families currently have to pay 40% inheritance tax on the value of an estate over £325,000.

This will see grieving families collectively pay an additional £1bn in IHT in 2026-27 and 2027-28, according to calculations by wealth manager Quilter.

This is due to a phenomenon known as the “tax drag,” where inflation and rising incomes push more taxpayers into higher tax brackets.

This means the average IHT bill will also rise from £216,000 in 2019-20 to £297,793 in 2025-26 and then again to £336,605 for 2027-28 due to the impact of the frozen thresholds combined on the rise inflation, according to the Wealth Club investment service.

Alex Davies of the Wealth Club said: “Freezing the inheritance tax threshold for two more years – until 2027-28 – is a tax hike on the sly. It won’t appear on a list of tax increases, but it won’t be long before its impact is felt on unsuspecting families. And it won’t just be about the super-rich. It will be the thousands of hard-working families caught in the crosshairs of high property prices and frozen IHT benefits.

Separate calculations by tax firm RSM show that an additional 10,000 families could end up paying IHT in those two years due to the thresholds not increasing with inflation.

The zero rate band – the amount that can be passed on before IHT is due on the estate – has been stuck at £325,000 since April 2009, so extending the freeze to 2027-28 means the rate band no one will be unchanged for nearly 20 years. years, despite soaring house prices pushing many areas above the threshold.

Tim Stovold, of accountancy firm Moore Kingston Smith, said the relief available had not kept pace with the growth of a family’s main asset, their home.

Average house prices have risen by £140,000 between 2009 and 2022, according to Land Registry data.

The zero-rate residential band, introduced in 2017 to account for house prices increasing the size of properties, was also frozen at £175,000.

Quilter estimates that, if increased in line with inflation, the zero-rate bracket would be worth £351,520 in 2027-28, while the residence zero-rate bracket would be worth £189,280, meaning fewer families would be taken to pay the IHT because an average couple would have £80,000 more in compensation.

In 2009, only 2.7% of estates paid inheritance tax, but in recent years the proportion has remained consistently close to 4%. In 2019-20, the last year for which data exists, 23,000 families paid inheritance tax.

Andrew Tully, of financial services provider Canada Life, said: “Although the IHT has always been a tax on the very wealthy, that is clearly no longer the case. With most personal tax allowances, including the standard and residency zero rate bracket, frozen until at least April 2026, this is now a concern for wider sections of society as the IHT tax net widens.

The revenue the government generates from the IHT has soared in recent years to a record £6.1bn for 2021-22, up 14% year-on-year, and the latest statistics suggest that this year IHT’s receipts could once again break records.

Although house prices are expected to fall, Shaun Moore of Quilter said he did not expect this to have an impact on the number of properties caught in the IHT net. “While house prices could soon fall due to the endless list of financial problems facing the UK, such as inflation, energy prices and an unpredictable European war, there is little likely to relieve IHT bills for a while.”

James Ward, of Kingsley Napley LLP, said: “IHT is seen by some as double taxation as people already pay income tax during their lifetime and is often described as one of the most hated taxes.”

In a recent YouGov poll of 1,700 people conducted by the law firm, nearly half (48%) thought the IHT should be abolished altogether.

A Treasury spokesman said: ‘We do not comment on speculation about tax changes.

Comments are closed.