The inheritance tax threshold was once there to ensure that the average household did not face significant tax liabilities following the death of a loved one. A large portion of the population could claim their inheritance without needing to sacrifice a big chunk of it to the state.

But, for the threshold to remain fair and reflective of what the economy is doing in any given year or decade, it needs to change. The current threshold was set way back in 2009. Since 1995, the threshold had been updating every year in April, significantly rising each time to reflect the changing economy and market. Over the years, financial advice on reducing inheritance tax has come to encompass a much greater demographic than it once did. 

Promises of a change to the threshold have come and come, with the topic typically rearing its head around the run up to elections. Just this year, Sunak announced plans to abolish inheritance tax as part of his pre-election policy. 

But can we hang our hopes on an attractive promise? Is it realistic to think that, after representing an immovable object for nearly fifteen years, inheritance tax could disappear entirely? 

The Inheritance tax threshold: a brief summary

The threshold currently sits at £325,000. When you die, the total value of your estate – your bank accounts, digital assets like crypto and NFTs, investments, businesses, property, and any other valuable possessions – will be calculated, and, if that value surpasses the threshold, your estate will be liable to pay tax.

The tax is not applied to the entirety of your estate – only the value that exceeds the threshold. So, if your estate was valued at £500,000, only £175,000 would be taxed. 

The standard rate is currently 40%, meaning that £70,000 would be paid to the state. Of course, there is also the residence nil rate band to consider, which can make it easier to pass on your main residence to a direct descendent by raising the tax-free allowance by a further £175,000. Even so, IHT is a significant amount of money for any family who needs to pay it, and it’s understandable why so many people feel resentful about having to pay it. 

As of July 2023, the average house price in England was £309,000. In light of that, it’s safe to say that a substantial portion of the population is on track to pay tax on their inheritances. For anyone dependent on this money, even a relatively minor amount that exceeds the threshold can have a significant effect on the beneficiary. 

In 2021, it was announced that the IHT threshold would be frozen for five years, until 2026. This was a real blow to the general public. With interest rates climbing, the cost of living growing ever higher and, with it, the value of the average property going up, a frozen threshold means more liability and more inheritances slashed. 

There are many ways to reduce this impact through effective inheritance tax planning. It’s not as simple as putting your savings into trusts or passing ownership of your home onto a child or partner before you die – and it’s a real mistake to think that avoiding inheritance tax is that simple. If your estate exceeds the threshold, then you can’t avoid IHT entirely, but you can work with us to ensure that more of your money goes to the right people rather than the state. Still, minimising its impact requires many years’ worth of preparation; it cannot be achieved in the 11th hour.

When Will the Inheritance Tax Threshold Go Down?

At this point, no one knows for certain. It’s often stated that only a small portion of the population is liable to pay inheritance tax, but ‘small’ is certainly relative here. Inheritance tax currently brings in billions of pounds. In the 23/24 tax year, it is estimated that IHT will bring in £7.2 billion for the state. 

So, while a small minority of the population pays this tax, that still amounts to a great many people. Financial plans need to look far into the future, beyond our own lives, if they’re to affectively tackle the daunting question of inheritance tax. As inflation continues to be unpredictable, something will have to change – and the policymakers are well aware of this.

As a result, IHT is an incredibly unpopular tax – often lauded as the least popular tax in the UK. Any party that promises to reduce or scrap inheritance tax altogether will likely see a boost to their popularity, but the fact that IHT only impacts a ‘small’ portion of the population could mean that abolishing the tax does not yield the sort of fruit Sunak needs to secure another victory for the Conservative party. 

Please note: Inheritance tax planning, will writing, estate planning and trusts are not regulated by the Financial Conduct Authority (FCA).