Inheritance Tax freezes this winter until 2028 and hits more people with an IHT bill

Tower Street FinanceBy Legal Futures Associate Tower Street Finance

Following the recent Autumn Statement announcement that the Inheritance Tax threshold will be frozen until 2028, we look at whether this is positive or negative for the average person.

Whilst not a headline tax increase, it definitely has the hallmark of a stealth tax. Freezing the threshold may sound positive, however in practice this means many more people who do not consider themselves wealthy will be facing an IHT bill.

Freezing Inheritance Tax will hit more people

Inheritance Tax is viewed as a tax on the rich, but after years of continued property price rises, many more people now find themselves hitting the IHT threshold. Clearly, the super-rich are likely to be caught by some form of IHT liability already, so any modest change to the threshold will have minimal effect for them.

Whilst the allowance can be as high as £1m if there is a couple and the house is left to direct descendants and the Property Nil Rate Band is used, the majority of Estates start incurring IHT at lower amounts.

With average property prices having risen from £157,000 in 2009 to £292,000 in 2022 (and increasing share prices – the FTSE100 Share index moving from around 4,000 to over 7,000 over the same period), then freezing the allowance for longer is going to include more estates in the IHT net.

Around 25,000 estates incurred IHT per year pre Covid. This was around just over 4% of all estates applying for probate. Covid caused that figure to increase to 30,000, or 5% of estates, as people were not able to plan to avoid IHT.

Average Inheritance Tax bill continues to rise

In terms of the size of IHT bills, the average IHT bill was around £165,000 in 2010, this has now grown by almost £50,000 to around £215,000. With the freeze in place, the average bill is projected to hit around £280,000 by 2028, a further rise of circa £65,000.

Dicky Davies: Business Development Director and co-founder of Tower Street Finance said:

“Whilst historically IHT has only been payable on large estates, the continued freezing of allowances, coupled with increasing property and share prices, means that over 1 in 10 estates are likely to incur IHT going forward. With an average IHT bill of around £200,000 and rising, that means a lot of Executors are going to find themselves struggling to find the money to pay the IHT which is needed in order for them to get the Grant of Probate”.

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