The UK's tax authority, HMRC, is under growing pressure to significantly increase the Inheritance Tax (IHT) threshold, which has been frozen for over two decades while property prices have skyrocketed.
The current nil-rate band of £325,000 has remained unchanged since 2009, dragging millions of ordinary families into the IHT net as the average UK house price now sits at £282,000, pushing many estates over the threshold when combined with other assets.
The Frozen Threshold Trap
Experts are warning that the deep freeze on the IHT allowance, set to continue until at least 2028, represents a stealth tax on middle Britain. What was once considered a tax solely for the wealthy now ensnares growing numbers of families who simply own modest homes and wish to pass them on to their children.
Sean McCann, a chartered financial planner at NFU Mutual, emphasised the scale of the issue: "The nil-rate band has been frozen at £325,000 since 2009. If it had increased with inflation, it would now be worth over £500,000."
A Regional Breakdown of the Burden
The impact of the freeze is being felt unevenly across the country:
- London & South East: Homeowners are particularly hard-hit, with average property prices far exceeding the threshold.
- Northern Regions: While initially less affected, rising prices mean more families are now facing unexpected tax bills.
- Rural Areas: Agricultural and inherited family homes are pushing estates over the limit.
Understanding the Rules and Allowances
Navigating IHT can be complex. The main elements include:
- Nil-Rate Band: The £325,000 allowance per individual.
- Residence Nil-Rate Band: An additional £175,000 allowance when passing a main residence to direct descendants.
- Transferable Allowance: Unused allowances can be transferred between married couples or civil partners.
This means a married couple could potentially pass on up to £1 million without incurring IHT, but this still fails to keep pace with property inflation in many parts of the country.
The Political and Economic Pressure
The Treasury's revenue from IHT has reached record levels, prompting calls from backbench MPs, tax campaigners, and financial experts for a fundamental review of the system. The argument centres on fairness—the threshold should reflect the dramatic increase in property values over the past two decades to avoid penalising ordinary homeowners.
With the freeze set to continue for several more years, the number of families facing a 40% tax bill on their inheritance is expected to climb steadily, making this a critical financial planning issue for millions.
