Inheritance Tax Thresholds Frozen Until 2030: What This Means for Families

Quick Summary

• The inheritance tax threshold (nil-rate band) has been frozen at £325,000 since April 2009
• It will remain frozen until at least April 2030 - a 21-year freeze
• If it had risen with inflation, the threshold would be approximately £490,000 today
• The residence nil-rate band (£175,000) is also frozen until 2030
• HMRC collected a record £8.2 billion in inheritance tax in 2024/25
• An estimated 10,500 additional estates will pay IHT each year due to frozen thresholds

What Are the Current Thresholds?

For the 2025/26 tax year, the inheritance tax thresholds are:

Tax rate: 40% on the value of the estate above the threshold (36% if leaving 10% or more to charity).

What Is Fiscal Drag?

"Fiscal drag" occurs when tax thresholds don't increase in line with inflation or asset price growth. As wages rise and property values increase, more people are pulled into paying taxes they wouldn't have paid if thresholds had kept pace.

The Impact on Inheritance Tax

When the nil-rate band was set at £325,000 in April 2009:

• The average UK house price was approximately £150,000
• Today, the average UK house price is approximately £290,000
• In London and the South East, average prices exceed £400,000

This means a family home that would have been well under the threshold in 2009 may now push an estate into inheritance tax territory, even if the deceased had only modest other assets.

Record Inheritance Tax Receipts

The freeze on thresholds, combined with rising property values and other assets, has led to record inheritance tax collections:

• 2024/25: £8.2 billion (record high)
• 2023/24: £7.5 billion
• 2022/23: £7.1 billion
• 2019/20: £5.2 billion (pre-pandemic)

The government estimates that extending the freeze until 2030 will bring an additional 10,500 estates into paying inheritance tax each year compared to if thresholds had risen with inflation.

Who Is Most Affected?

Homeowners in High-Value Areas

The freeze disproportionately affects families in areas with high property values, particularly London, the South East, and parts of the South West. A family home worth £400,000 combined with modest savings and a pension could easily exceed the threshold.

People Dying Without a Spouse

Married couples and civil partners can transfer unused nil-rate band to the surviving spouse, giving a combined allowance of up to £1 million. Single people, widowed individuals (depending on timing), and those in unmarried relationships only have the individual allowance of up to £500,000.

Families Where the Home Doesn't Pass to Children

The residence nil-rate band (£175,000) only applies when the family home passes to direct descendants. If the home passes to siblings, nieces, nephews, or friends, this additional allowance is lost.

The Residence Nil-Rate Band: Conditions and Limits

The residence nil-rate band (RNRB) provides an additional £175,000 allowance, but only if specific conditions are met:

Qualifying Conditions

• The deceased must have owned a home (or a share of one) at some point
• The home (or assets of equivalent value if downsized) must pass to direct descendants
• Direct descendants include children, grandchildren, step-children, and their spouses
• It does not include siblings, nieces, nephews, or other relatives

Tapering for Large Estates

The RNRB is reduced for estates worth more than £2 million. The reduction is £1 for every £2 of estate value above £2 million. This means:

• At £2.35 million, the RNRB is completely eliminated for an individual
• At £2.7 million, it's eliminated for a couple

What This Means for Executors

If you're administering an estate, the frozen thresholds mean you need to be particularly careful about valuations:

Accurate Valuations Are Critical

With thresholds frozen and more estates close to the boundary, accurate date-of-death valuations are essential. A difference of a few thousand pounds could determine whether inheritance tax is payable.

Check RNRB Eligibility

Ensure you understand whether the estate qualifies for the residence nil-rate band. This could be worth £175,000 (or £350,000 for a surviving spouse's estate).

Consider Reliefs and Exemptions

With more estates near the threshold, make sure you claim all available reliefs:

• Spouse exemption (unlimited transfers between spouses)
• Charity exemption (and 36% rate if leaving 10%+ to charity)
• Business property relief
• Agricultural property relief
• Gifts made more than 7 years before death

Looking Ahead: Will Thresholds Ever Rise?

The current freeze is legislated until April 2030. After that, the government could choose to:

• Continue the freeze - extending the current approach
• Increase thresholds - either to catch up with inflation or by a smaller amount
• Reform the system - potentially replacing IHT with a different form of wealth tax

Given that inheritance tax now raises over £8 billion annually, any significant increase in thresholds would require the government to find alternative revenue sources. Political and fiscal pressures make major threshold increases unlikely in the near term.

Key Takeaways

• The £325,000 nil-rate band has been frozen since 2009 and will remain frozen until at least 2030
• This "fiscal drag" is pulling thousands more estates into paying inheritance tax each year
• If thresholds had risen with inflation, the nil-rate band would be approximately £490,000
• The residence nil-rate band (£175,000) provides additional relief but has strict conditions
• HMRC collected a record £8.2 billion in inheritance tax in 2024/25
• Executors should ensure accurate valuations and claim all available reliefs
• Significant threshold increases are unlikely given current government reliance on IHT revenue

The frozen thresholds represent a significant "stealth tax" increase for many families. Understanding the current rules and planning accordingly can help minimise the impact on bereaved families.