Frozen inheritance tax thresholds are costing families £62k

The long-standing freeze on the main inheritance tax (IHT) threshold since 2009 is pushing more estates into the tax net, costing bereaved families nearly £62,000 on average, new research has found.

The research carried out by interactive investor found the IHT liability has risen from an average of £106,000 to £157,000 for estates with a property based in London and the South East.

This is largely due to rocketing house prices, which have been most significant in these regions over the 14-year period since the threshold was last raised.

Meanwhile, growth in investments and savings, which were among the key assets factored in the firm’s calculations for IHT liability over the 14-year period, means that even “modest” estates could now be subject to IHT.

As per interactive investor’s research, the value of the three assets combined (house prices, savings and investments) increased to an average of £479,229 by the end of March 2023, which sees IHT liability totalling £61,692.

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These calculations are based on growth in the price of the average property as recorded by the Office for National Statistics, which has shown an increase of 86 percent from from £154,452 to £285,009.

The FTSE All Share index returned just under 245 percent 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 nine percent), turned £20,000 into £21,820.

When the value of all three assets is combined, the estate would have been worth £224,452 back in March 2009 – which would have fallen within the IHT nil rate band of £325,000. Now, the combined value exceeds it by £61,692.

Myron Jobson, senior personal finance analyst at interactive investor, commented: “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 remained 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.”

Mr Jobson added: “Residential property makes up the largest share of most estates and average house prices have risen by 85 percent between 2009 and the end of February 2023. Adding growth on investments and cash savings to the mix pushes many beyond the tax-free threshold.”

Describing IHT as a “money spinner” for the Treasury, Mr Jobson said the tax generated £600million for the Government in April 2023 alone.

While no one likes to think about their own mortality, Mr Jobson said it is important that people organise their finances in advance to reduce any potential liabilities and pass on more to their loved ones.

Alice Guy, head of pensions and savings at interactive investor, weighed in: “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.”

Ms Guy said married couples can also transfer any unused nil rate band, effectively “doubling” their exemption.

She added: “This means it’s possible for married homeowners to pass on up to £1million free of inheritance tax.”

For those who have a pension pot and a stocks and shares ISA, people could also save inheritance tax by using their ISA first and leaving their pension invested.

Ms Guy said: “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 annual exemptions can also be a great way to pass on wealth and avoid a big tax headache.

Ms Guy said: “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.”