IHT receipts will rise further after NRB freeze

Hugi Clarke

Hugi Clarke

After the usual frenzied speculation around the Budget earlier this year, what we saw was a typically restrained Budget with no radical changes to the tax system.

Perhaps this is not a surprise in the context of budgets past, though it may have bowled you over if you expected a radical change to UK taxation as a result of the often compelling speculation.

But while, on the face of it, the Budget made little more than considered tweaks around the edges, some of the changes could have a profound impact on the tax burden for many.

Discussion is beginning to bubble on the actual impact of personal allowance rates/income tax ,and similar points can be raised with regards to inheritance tax.  

In this years’ budget, it was announced that the nil-rate band will be frozen to 2026. This is not so surprising in the context of other announcements and represents the (recent) norm when it comes to inheritance tax allowances. 

The NRB has been frozen since 2009-10, so a further five years of static allowances is perhaps unsurprising.  The residence nil-rate band was due to rise with inflation from the next tax year but has suffered the same frozen fate.

This means the NRB has been stuck at £325k since 2009-10 and the RNRB will be fixed at £175k for several years to come. So far, so unremarkable, until you look at the potential impact of these changes. 

When the NRB was originally frozen, IHT receipts were around £2.5bn and had been on a downward trend since 2007-08. The freeze saw an end to this decline and triggered a sharp rise in IHT receipts, with revenue from IHT more than doubling in the decade that followed.

The RNRB, introduced in 2017-18, slowed (but did not stop) the growth in IHT receipts. Despite being the largest increase in personal allowances in recent memory, IHT revenue increased to £5.2bn in 2019-20 from £4.8bn in 2017-18.  

So what can we expect now these allowances are frozen? If the current freeze follows the patterns set previously, it could trigger growth in receipts of -60 per cent, taking total IHT revenue to -£8.5bn by the end of 2026. This is not only significant in terms of the tax burden, but in terms of the number of estates that would be impacted.  

Between 2011 and 2015, the number of estates subject to IHT grew by 43 per cent, bringing the tax to the homes of many who had never considered themselves wealthy in the traditional sense. 

There were several drivers behind this – increasing house prices, strength of equity markets etc – but the frozen nil-rate allowance was a substantial contributor. It is difficult to say whether the current freeze will herald a similar expansion of affected estates, but it is certainly one to watch.