In the Autumn statement, Conservative chancellor Jeremy Hunt confirmed that the Inheritance Tax threshold would be frozen at £325,000 until 2028 in a bid to provide additional income for the government. Hunt originally made the decision to freeze the IHT threshold last Spring until 2026 but has now announced the two-year extension as a result of recent economic challenges the government has faced. As inflation pushes wages and asset value up, this decision is estimated to result in an additional 10,000 families becoming liable for IHT when they would’ve previously been in the nil-rate bracket. If the IHT allowance was to be increased proportionately to inflation, it would now be set at £464,000 rather than £325,000.
Who is liable for paying IHT?
Those liable to pay IHT will have to pay 40% to the government on any part of their estate that is above the IHT nil-rate threshold, now frozen at £325,000.
You do not need to pay IHT if:
- You leave the entirety of your estate to your spouse.
- Your estate is worth less than £325,000.
If an individual passes away and leaves their estate to their spouse or civil partner, that partner will also inherit their IHT tax allowance, meaning their beneficiaries will not pay any tax on inheritance worth under £650,000.
If an individual were to pass on their home to their children or grandchildren, this can increase that person’s IHT allowance to 500k.
There are several other ways to reduce your IHT payments, such as gifting money whilst you are still alive. Your beneficiary will still have to pay tax on this amount if you pass away within 7 years, but this amount will decrease as each year passes from the time of gifting (taper relief).
You may also be able to reduce your IHT rate to 36% if you leave 10% of your estate to charity.
How effective has this freeze been for the government so far?
Since its implementation, the freeze has been incredibly successful, generating £4.1 billion for the government between April and October of 2022 – an increase of £400 million compared to the same time period last year
The freeze is expected to generate almost 33% more per year by 2027 than the amount today.
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