Any estate value above the NRB is taxed at 40%. The NRB has been fixed at £325,000 since 2009/10 and will stay at that level until at least 2031.
The NRB used to rise annually, roughly tracking inflation. If that had continued, it might be around £500,000 today and £570,000 by 2031. Meanwhile, rising estate values have steadily increased HMRC’s inheritance tax revenue.
In 2017, the residence nil-rate band (RNRB) was introduced to offer extra relief for passing a main home to direct descendants, but this allowance has been frozen at £175,000 since 2020.
By 2031, the combined NRB and RNRB will still total £500,000 per person. If both had kept pace with inflation, their combined value could be about £796,000. What started as a temporary freeze now feels more like an extended freeze, or an ice age.
With upcoming IHT changes, including cuts to business relief from 2026 and pensions being included in estates from 2027, effective inheritance tax planning is now more crucial than ever.
What choices do your clients have?
One option is to spend their wealth, which quickly lowers IHT exposure, though they should avoid assets likely to appreciate. Some may use life assurance to cover the tax bill on death, but this doesn’t eliminate the IHT liability and involves ongoing costs.
Gifting is another effective strategy. Gifts reduce the estate’s value, and if the donor lives for seven years after making them, the IHT liability on those gifts is removed.