Inheritance tax threshold frozen until 2030
Nobody likes paying taxes, but inheritance tax (IHT) tends to spark a particular frustration. After all, you earn, invest and save all your life. You wish to provide a solid financial base for your family after you pass and then, you get taxed when you die. With the government keeping the IHT threshold frozen at £325,000 until 2030, many households are wondering what this means for them and the financial legacy they may leave behind.
As property values continue to climb, more and more estates are being pushed into the taxable bracket, potentially leaving loved ones with unexpected tax bills.
With the IHT threshold frozen until 2030, let’s see how this new rule could affect you and your money.
What you will learn in this article
- An overview of inheritance tax and how it works
- The current IHT threshold and additional available allowances
- How families could be impacted with the IHT threshold frozen until 2030
- Real-world examples of estates facing increased taxes
- The different ways to avoid this tax and preserve wealth
- Why taking action now matters more than ever
Related reading: Budget 2024 & inheritance tax changes
Understanding IHT
What is IHT? Think of it as the government’s 40% slice of your estate’s value above the tax-free IHT threshold. While it was historically viewed as a “wealthy person’s tax,” the landscape is shifting. With rising property prices and growing investment portfolios, many ordinary families are finding themselves within its reach. For those seeking to get to grips with the details of this tax, read our IHT planning guide.
How does it work?
When someone passes away, typically they leave behind an ‘estate’.
This is the total value of their assets.
For ease of understanding, if the value of their assets exceeds the tax free allowance, a tax of 40% is charged.
To offer clarity, there are many rules, details and considerations governing this tax. Each individual case is different. And, as a result it’s important to state the above is a simple example outlining how IHT works in principle.
What is the current IHT threshold?
The basic inheritance tax threshold (nil-rate band) stands frozen at £325,000 – unchanged since 2009. Any estate value above this faces a 40% tax bill.
However, there’s a silver lining: an additional residence nil-rate band of £175,000 applies when passing your home to direct descendants. For married couples, this could mean a combined significant tax-free allowance.
Why is the IHT threshold frozen?
As mentioned earlier, on 30th October 2024, the chancellor Rachel Reeves announced the IHT threshold would be frozen until 2030.
It’s clear the government are seeking to increase tax receipts, and this is an area where they think they can.
A good move?
We’ll let you decide.
Impact of the IHT threshold freeze
By keeping the threshold static until 2030, the government is effectively expanding the IHT net.
Consider this: a family home valued at £300,000 in 2009 might now be worth £500,000 or more. Of course, this depends on many factors so please treat this figure as a guide.
With property prices continuing their upward march, many middle-income families could face tax bills once reserved for the wealthy.
Key considerations:
- How rising property values might push your estate over the threshold
- Projecting your estate’s value by 2030
- Strategic use of lifetime gifting and trusts
- Understanding if you qualify for the residence nil-rate band
How to avoid IHT
With the IHT threshold frozen until, 2030, if you are now looking ahead and feeling concerned, this section should offer you some hope.
Gifts, trusts and life insurance
Planning ahead can help you avoid IHT and protect your family’s inheritance from excessive taxation. While many people know about passing their home to children or using their spouse’s tax exemption, there are several lesser-known strategies worth considering. If you are thinking about gifting property, make sure you have a good understanding of the seven-year rule for IHT.
For example, the residence nil-rate band offers additional tax relief when leaving your home to direct descendants. Meanwhile, setting up a trust can help reduce or avoid IHT, or exploring equity release are good options.
Furthermore, many families also find that taking out a life insurance policy written in trust provides their beneficiaries with funds to settle any tax bills without having to sell cherished assets.
Regular gifts from your surplus income can steadily reduce your estate’s value, while the annual gift exemption allows you to give away set amounts tax-free each year. For business owners or investors, assets qualifying for business property relief (BPR) can offer significant tax advantages.
Lastly, some families even consider relocating to more tax-friendly countries as part of their long-term planning strategy.
Concerned your estate may exceed the IHT threshold?
After reading this section, you may wonder whether your estate will likely exceed the threshold in future. As a result, you may be wondering if you now need an inheritance tax adviser to guide you through the process of reducing this burden.
If that’s the case, call us today on 020 3740 5856.
Looking ahead to the future
The IHT threshold freeze makes long term estate planning advice more crucial than ever. While more families are being drawn into the tax net, there are still plenty of ways to avoid IHT and protect your legacy. From lifetime gifting to trust arrangements and maximising available allowances, careful IHT planning can help ensure your wealth reaches your loved ones rather than the taxman.
Article FAQs
Here is a short selection of questions and answers on the topic of the IHT threshold.
I’m planning to downsize my home before 2030. Will I lose my residence nil-rate band allowance?
Not necessarily. Thanks to ‘downsizing protection’, if you sell your larger property and move to a less expensive home, you could still benefit from the residence nil-rate band based on your previous property’s value. You’ll need to keep good records of the property values and ensure the smaller property or equivalent assets pass to your direct descendants.
Could the government change the IHT threshold again?
The government has the power to adjust inheritance tax thresholds and rates at any time through Budget announcements or tax reforms. While the current freeze is set until 2030, tax policies can change if economic or political circumstances shift. It’s best to focus on flexible estate planning strategies that can adapt to any future changes.
If my estate will be over the IHT threshold, can I take out a life insurance policy to cover it?
Yes, this could be a smart strategy – but the policy must be written in trust. Firstly, this is still a complex matter, and we recommend engaging an IHT specialist. Without this crucial step, the payout would become part of your estate and potentially incur IHT itself. A whole-of-life policy written in trust can provide your beneficiaries with a tax-free lump sum specifically to cover the IHT bill, though premiums can be expensive if you take out the policy later in life.
External resources
Budget 2024: IHT thresholds frozen until 2030 (FT Adviser)
UK’s chancellor extends inheritance tax threshold freeze to 2030 (Reuters)
