The cold shoulder of the inheritance tax freeze

In the government's Autumn Statement, Jeremy Hunt announced that inheritance tax allowances will be frozen until the end of the 2027/28 tax year. Jerome Dodge, partner, head of private client and independently recognised by the Legal 500 as an expert in Wills, trusts and estate planning, provides his view that all may not be as it appears on face value… :-

The inheritance tax nil rate band of £325,000 has been fixed at the same amount since 2009. The Financial Times recently reported that had the nil rate band risen in line with inflation it would now be £428,000. House prices during this period have risen by 84%.

Even applying a conservative inflation figure it seems very likely that if the nil rate band had increased/increases in line with inflation from 2009 until 2028 then the allowance would then be in excess of £500,000 rather than the £325,000 it will be. When the government previously announced the freezing of the nil rate band until the end of the 2026/27 tax year, the Office for Budget Responsibility estimated that this will increase the Inheritance Tax take from £5.4 billion in the 2020/21 tax year to £8.3 billion in 2026/27. Therefore, without increasing the rate of inheritance tax, the government will significantly grow the amount it receives.

In 2017 the government introduced an additional allowance of up to £175,000 (also frozen in value since) known as the residence nil rate band. Both the nil rate band and residence nil rate band are, in principle, transferable between spouses. However, the residence nil rate band only potentially applies where the deceased is leaving appropriate assets to “lineal descendants”. The law is very complicated in this regard, and it is easy to inadvertently lose the opportunity for a person's estate to benefit from the residence nil rate band (and to fully benefit from all available nil rate bands) particularly where circumstances involve a second marriage.

It is often said that inheritance tax is a voluntary tax. Whilst I don't necessarily agree that this is always the case, it is true that most people can plan and minimise the inheritance tax their estate will pay – and the earlier this is considered the better. The forthcoming reductions in capital gains tax allowances makes this even more pressing in many cases.

Future articles will look at what can be done to save inheritance tax using case studies including looking at pitfalls and opportunities both from a legal and financial planning point of view.

Our private client team specialise in inheritance tax planning and regularly work in conjunction with other professional advisers to achieve our clients’ goals. To find out how you can minimise your inheritance tax exposure, contact Jerome Dodge or a member of his team on 01258 459361.