Inheritance tax thresholds have been frozen for a shockingly long time (Image: Getty)
He’s not the first Chancellor to do that. In fact, it’s been going on for decades, thanks to a longstanding stealth tax known as fiscal drag. This is where tax thresholds stay frozen while incomes, house prices and wealth rise, gradually pulling more people into the tax net or increasing the amount they pay. It’s even more brutal than you think, with one IHT allowance now frozen for more than 50 years. This is on top of direct IHT tax raids, such as the plot to bring unused pension pots into the IHT net from April 6, 2027, courtesy of former Chancellor Rachel Reeves.
Rachael Griffin, tax and financial planning expert at Quilter, said this is one of many factors that are helping to drive IHT bills ever higher. “What was once viewed as a tax affecting only the wealthiest households is increasingly becoming a mainstream financial planning issue.” Incredibly, one IHT allowance hasn’t increased since 1975, when Labour’s Denis Healey was Chancellor.
Parents can give a child up to £5,000 when the child gets married or enters a civil partnership without triggering IHT. Had that £5,000 allowance risen with inflation, it would now be worth £39,876, according to NFU Mutual. Back in 1975, £5,000 represented around 56% of the average UK house price of £8,942. Today, the average UK property is worth £272,000, meaning the same £5,000 gift covers just 1.83% of the value.
The wedding gift allowance for a grandchild has remained at £2,500 since 1975, while the exemption for anyone else is still £1,000. If both had kept pace with inflation, they would now be worth £19,938 and £7,975 respectively.
The £3,000 annual gift allowance has been frozen since 1981. If it had risen with inflation, it would be worth £11,875. It’s another example of how inflation has steadily eroded the value of these allowances. There’s also a small gifts exemption allowing people to make unlimited gifts of up to £250 per recipient each tax year. That hasn’t changed since 1980 and would be around £1,100 if inflation-linked.
Sean McCann, chartered financial planner at NFU Mutual, said: “The freeze on allowances means families are being painted into an increasingly tight corner.” The biggest frozen allowance is the £325,000 nil-rate band, which has remained unchanged since 2009. Had it tracked inflation, NFU Mutual calculated it would now be worth £532,500.
Married couples and civil partners can transfer unused allowances between them, potentially allowing a qualifying couple to pass on up to £1 million without IHT. If the main allowances had kept pace with inflation, that could have risen to more than £1.5 million.
For families, McCann checks which allowances are available, keeps records of gifts and understands the seven-year rule. Gifts that fall outside the exemptions can remain relevant for IHT for seven years after they’re made. There is one exception to the fiscal drag raid, the ‘regular gifts from income exemption’, McCann said. “This allows you to give away regular amounts from income, provided you retain enough to maintain your normal standard of living.”
This can include gifts direct to loved ones, into their pensions, or into investments held in trust for their benefit, he added. There is no guarantee this will last, amid speculation that John Healey may target this next. Right now, nothing is safe.
