Calls to revamp inheritance tax never seem to go away, so it was a surprise to hear the two main allowances were frozen earlier this year.

Chancellor Rishi Sunak used his Spring Budget on 3 March 2021 to freeze the nil-rate band and residence nil-rate band up to and including 2025/26.

While that seemed sensible on the face of it, it does seem like a stealth tax grab which will drag more estates into its net over the next five years.

Buried in the smallprint was the Treasury’s projections, in which it expects to net an extra £15 million in 2021/22, rising to £445m in 2025/26.

The Treasury predicts HMRC will collect a total of £985m in death duties from people’s estates up to and including 5 April 2026.

So, let’s recap where we are in 2021/22 and explore ways to protect your estate from the big freeze over the coming years.

The nil-rate band

The tax-free amount of your estate you can leave to your beneficiaries when you die remains £325,000. This has been unchanged since 2009.

Should the value of your estate exceed this amount, the excess could be liable to a 40% inheritance tax charge.

Assets such as your money, property and possessions all count towards the value of your estate.

If you are married, your surviving spouse usually inherits your estate when you die along with any of your unused nil-rate band.

The residence nil-rate band

There has been one more increase to the residence nil-rate band since we last wrote about inheritance tax for 2019/20.

On 6 April 2020, this allowance increased from £150,000 to £175,000. This remains the case today, and will be in place up to and including 2025/26.

The residence nil-rate band can increase your individual tax-free threshold to £500,000, as it sits on top of the £325,000 nil-rate band.

For married couples, it’s possible to leave this maximum combined inheritance tax allowance to your surviving spouse after you die.

Why the freeze will catch more estates

The stamp duty land tax holiday announced in July 2020 continues to create a frenzy in the UK’s residential property market.

According to the Office for National Statistics, the average house price in England as of May 2021 was £271,000 – up 10% on the previous 12 months.

With house prices on the rise, these significant increases have real potential to nudge more estates over the tax-free thresholds.

Combine that with a rebounding stock market and the freeze, and you can see many more estates being caught in inheritance tax’s net.

Inheritance tax planning opportunities

If you leave your main residence to a direct descendant, you will qualify for the residence nil-rate band. This protects the first £500,000 of your estate.

You can start to reduce the value of your estate by making gifts, just be aware of the tax implications if you were to die within seven years.

Alternatively, you can donate at least 10% of your estate to charity and qualify for a lower inheritance tax rate of 36%.

Inheritance tax planning forms a large part of our personal tax service. For expert help with planning your estate, contact us on or call 01363 773191.

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