New research suggests the threshold should be considerably higher than it is
Allowances have been frozen since 2009(Image: coldsnowstorm via Getty Images)
High net worth individuals (HNWIs) in the UK believe that HMRC’s Inheritance Tax (IHT) thresholds should be updated, according to the latest research from wealth manager Saltus. It said findings from the Saltus Wealth Index – a study of 2,000 UK adults with assets of £250,000 or more – showed widespread belief that this static threshold was outdated.
Half (50%) of respondents believed the threshold should be increased, while nearly a third (30%) thought inheritance tax should be abolished entirely. The IHT nil rate band has been frozen at £325,000 for almost 17 years, despite significant rises in inflation and property values over that time.
The last increase came in April 2009, when it rose from £312,000 to £325,000, a rise of around 4%. This freeze has meant a growing number of estates have become liable for the tax without any formal change in rates.
Around one in eight (16%) supported a threshold between £500,000 and £1m, while 8% favoured a higher range between £2m and £5m. On average, respondents believed the threshold should sit at around £1m.
Concerns around IHT are also reflected in perceptions of fairness, Saltus said. After higher rates of Income Tax at 40% and 45% (22%), Inheritance Tax (16%) is viewed as the most unreasonably high tax in the UK. Among those aged 55 and over, this rises to 28%, making it the tax they are most likely to view as unreasonable.
If the IHT nil rate band had continued to grow in line with historical increases prior to 2009, it would now be around £581,000, Saltus said. Similarly, when tracked against long term house price growth since 1989, the threshold would sit at approximately £560,000 – still almost £235,000 higher than today’s frozen level of £325,000. These comparisons underline how far the threshold has fallen behind asset price growth over the same period, the analysts explained.
HMRC tax change from April 2027
It added that this growing disparity was set to widen further from April 6, 2027, when unused pension funds and death benefits will be included within an individual’s estate for Inheritance Tax purposes. As pensions have historically sat outside of IHT, their inclusion is likely to bring significantly more estates above the threshold, further widening the gap between the threshold and the value of many estates.
Alex Pugh, chartered financial planner at Saltus, said: “Keeping the threshold frozen effectively acts as stealth taxation, increasing the number of estates caught by Inheritance Tax without formally raising rates. If high value assets such as pensions are going to be brought into the IHT net, there is a strong argument that thresholds should at least start rising again. Even modest increases, in line with inflation for example, would help prevent more families from being pulled into the tax system simply because asset values have grown.
“High net worth individuals are increasingly concerned that pensions entering the scope of Inheritance Tax could have a significant impact on their estates. It is one of the biggest concerns amongst our clients at the moment – they want certainty about how these rules will affect them and what planning options are realistic.
“While in many cases the immediate impact may be limited because the spousal exemption continues to apply, the issue becomes even more relevant when benefits pass to children or other beneficiaries. Because the rules are changing, it is important that people review their estate planning arrangements, including death benefit nominations, and seek professional advice to ensure they still work as intended.”
