HMRC tax allowance ‘frozen for 17 years’ and ‘gets worse in 2027’ | Personal Finance | Finance

Wealthy individuals in the UK believe that HMRC’s Inheritance Tax (IHT) thresholds are in need of revision, according to the latest research from wealth manager Saltus. Findings from the Saltus Wealth Index — a study of 2,000 UK adults with assets of £250,000 or more — revealed widespread sentiment that the current static threshold is outdated.

Half (50%) of respondents believed the threshold should be raised, while nearly a third (30%) felt inheritance tax should be scrapped altogether. The IHT nil rate band has remained frozen at £325,000 for almost 17 years, despite considerable increases in inflation and property values over that period.

The last adjustment came in April 2009, when it climbed from £312,000 to £325,000, an increase of around 4%. This prolonged freeze has resulted in a growing number of estates becoming liable for the tax without any formal change in rates.

Around one in eight (16%) backed a threshold of between £500,000 and £1m, while 8% favoured a higher range of between £2m and £5m. On average, respondents felt the threshold ought to be set at around £1m.

Concerns surrounding IHT are also evident in perceptions of fairness, Saltus noted. After higher rates of Income Tax at 40% and 45% (22%), Inheritance Tax (16%) is regarded as the most unreasonably high tax in the UK. Among those aged 55 and over, this figure rises to 28%, making it the tax they are most likely to consider unreasonable.

Had the IHT nil rate band continued to rise in line with historical increases prior to 2009, it would now stand at around £581,000, according to Saltus. Equally, when measured against long-term house price growth since 1989, the threshold would sit at approximately £560,000 — still nearly £235,000 above today’s frozen level of £325,000. These comparisons highlight just how far the threshold has fallen behind asset price growth over the same period, the analysts noted.

HMRC tax change from April 2027

Saltus further warned that this growing disparity was set to deepen from April 6, 2027, when unused pension funds and death benefits will be brought within an individual’s estate for Inheritance Tax purposes. As pensions have historically sat outside of IHT, their inclusion is likely to draw significantly more estates above the threshold, further stretching 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.”