Frozen Inheritance Tax Allowances – Video Transcript
The current rate of inheritance tax is 40%
That means the value of your estate above your allowance is taxed at 40%.
Your allowance is known as the Nil Rate Band, which is so called because you pay no tax on that part.
Look at this simple example for a married couple to understand how this works.
The allowance you get, the Nil Rate Band is £325,000 per individual which means for a married couple or individuals and a civil partnership it is £650,000.
In addition there is a further allowance called the Residence Nil Rate Band that is now worth £175,000 per individual.
Put all this together and you have £500,000 per individual or £1 million per couple.
These allowances have been frozen at these rates until 2026.
This matters because the effect of a frozen allowance is much greater than it may first appear.
Firstly it means people who are not currently affected by inheritance tax, could be in the future.
A couple with an estate valued at £900,000 today who see this rise by 50% in the next 5 years would go from having a potential liability of zero to a potential liability of £140,000.
To show the true effect of the freezing aspect think of how much the allowance should be if it rose in line with inflation every year.
If you are in the bracket where you are potentially impacted by IHT then a frozen allowance if inflation is at say 3% per year means an extra amount of just over £30,000 of tax payable simply because the allowance has not increased.
It gets even more complicated.
If your estate exceeds £2 million because the Residence Nil Rate Band allowance is reduced if that threshold is exceeded and maybe lost all together
By freezing the allowance the Government has created an increased tax burden on the estate.
When the Chancellor of the Exchequer announces that an allowance will be frozen, it may sound innocuous, but it can be just as impactful as an outright rise in the rate of tax.
Taking advice and steps now to protect against this frozen allowance makes perfect sense.