Freezing of Inheritance Tax thresholds

The Chancellor has announced that the £325,000 nil-rate band threshold – the amount up to which no inheritance tax is payable either on lifetime or death transfers – is to be frozen for the next four years, effectively, this is until 5 April 2015.

Baker Tilly analysis

The nil-rate band for inheritance tax (IHT) has generally increased year-on-year since the introduction of IHT in 1986. In the last Budget, the Chancellor announced that the rate for 2010/11 would be same as for 2009/10, being £325,000.

That would have been the first time since 1986 that the rate has been frozen and he went even further in 2010 Budget to freeze the rate up to 5 April 2015. 

In detail

The annual increase in the nil-rate band has generally followed the Retail Price Index (RPI), although some bigger increases were given in recent years to allow for the booming property market, which was causing the effect of bringing increasingly large numbers of people into chargeable bracket of IHT.

As house prices remain steady and the RPI is close to zero, it is therefore arguable that there is no real tax increase year. The Chancellor, however, does predict some inflation and actually house prices have already shown increases over the past year. Over the next five years there will, inevitably, be some fiscal drag here. This will mean more and more people falling into the charge of IHT.

The failure to update the nil-rate band may also scoop into the IHT net those people who have been able to acquire property at the bottom of the market and can expect to see its value rise as we recover from the recession.

The Chancellor perceives IHT to be a tax payable only by the wealthy. That argument is becoming less sustainable as predicted increases in property values start catching up with people and is, in effect, a tax increase without raising the headline rate.