Simon Martin
Head of UK Technical Services
Inheritance Tax (or ‘IHT’ for short) as we know it today was introduced in 1986 when Nigel Lawson was Chancellor of the Exchequer. This replaced the earlier Capital Transfer Tax which itself replaced the previous Estate Duty regime in the UK.
Arguably, IHT was originally designed as a tax to target wealthier families whose wealth was being transferred following death, and it is often cited as being one of the UK’s most hated taxes.
In broad terms, IHT is payable where a person dies and the portion of their estate subject to IHT exceeds a certain threshold, known as the Nil Rate Band (‘NRB’). Following the changes announced in last year’s Autumn Budget, a person will be taxed to IHT on their worldwide assets if they are long-term resident. For those who are not long-term resident they will only be subject to IHT on their UK-situs assets and their overseas assets will be excluded from charge. A person is considered long-term resident for IHT purposes if they have been UK tax resident for at least 10 of the last 20 tax years prior to the tax year in which an IHT charge occurs (including split tax years).
The NRB, which is currently set at £325,000 for a single person, last increased back in April 2009 when Alistair Darling was Chancellor and Gordon Brown was Prime Minister. It is not set to rise again until at least April 2030!
This stagnation of the NRB since the noughties is rather naughty if you pardon the pun; over time it has effectively brought more and more estates into the scope of IHT.
To put this freeze of the NRB into context l have tabled below the changes in prices of certain items since 2009 to show how their values have increased:
| April 2009 | April 2025 | Increase | Source | |
| Average UK house price | £154,484 (December) | £269,000 | 74% | The Guardian & Gov.uk |
| Mars bar | 37p | £1.05 | 183% | this is money |
| Average price of a litre petrol | 86.9p per litre | 133.2 per litre | 53% | Statistica.com |
| Average price of a pint in the UK | £2.80 | £5.44 | 94% | ons.gov.uk |
This ‘fiscal drag’—raising revenue not by increasing tax rates, but by freezing thresholds while asset values rise, means even modest estates are now facing IHT charges.
Only recently the Daily Telegraph reported that there’s been a 40% increase in families in the North West pulled into the IHT net as a result of smaller estates being over the IHT threshold.
The point here is that prices have been rising, and these rises have further inflated the value of estates whilst the threshold where IHT is paid has remained static. This freeze in the NRB allows the Treasury to raise more money each year without having to increase the headline rates of tax. Here you will recall that the current Government’s manifesto was to not increase taxes on the ‘working people’ so this freezing of the bands is one way to not directly raise the tax rate yet still raise revenue received.
I should add here that successive Governments have tried to address these issues with further legislation:
- The introduction of the transferable nil rate band (‘TNRB’) in the Finance Act 2008.
This was introduced to make sure that, for people who had inherited their spouse’s or civil partner’s estate on first death, they would be able to utilise their unused NRB. Prior to this if the NRB wasn’t utilised on first death it would be lost entirely.
- The introduction of the Residence Nil Rate Band(‘RNRB’) in April 2017
This allows for an additional NRB where property (or proceeds) is left to children or other direct descendants. Like the NRB this can also be transferred if it’s not been used on first death.
However, many readers will understand that these reforms do not necessarily help everyone and there’s been many discussions and some legal cases around the unfairness of these rules.
For example, a person who has been cohabiting with someone (who is not their spouse or civil partner) for years in the same property cannot benefit from the TNRB as shown in the case of Burden v United Kingdom 2008.
Here the two sisters living together in a property tried to argue that it was discriminatory that they could not be treated like married persons and thus be able to claim the TNRB on the first death to reduce the inheritance tax burden on the survivor. They argued that without such a claim the survivor would be forced to sell their home, which formed the majority of their estate valuation. The case made it all the way up to the European Court of Human Rights who ultimately ruled against the sisters making it clear the rule only applied to spouses or civil partners and not persons co-habiting.
Since its introduction, the RNRB has also been widely criticised due to its complexity (especially around the so called ‘downsizing rules’) and the fact it discriminates against people who are not, or have never been, homeowners and/or have direct descendants. Furthermore, similar to the NRB, the RNRB itself has also been frozen for a number of years, remaining at a maximum of £175,000 since April 2020 and is also now set to remain at this level until April 2030 as confirmed in the Autumn Budget 2024. The RNRB is also tapered away if the estate exceeds £2m so for those very wealthy individuals this may be of no benefit.
Further problems are set to bestow UK long-term residents as unused pension pots are set to become part of a person’s estate from 6 April 2027; this will no doubt further increase the IHT exposure of some estates especially when considering the loss of the RNRB due to tapering.
All this means that IHT is likely to impact more people moving forward and given the recent pressures on Government evidenced by the Spring Statement and the reversal of Winter Fuel Payments (estimated at £1.25bn per year), and recent u-turns on disability reforms, we’re unlikely to see any tax ‘giveaways’ in the near future.
The message here is that IHT is likely to remain and it’s no longer a tax on the wealthy but rather a tax that can apply to any modest estate.
The good news is that there are many ways to mitigate this tax and in our next article we will explore several options available using straightforward trust planning with life insurance.