Each year, the thresholds for inheritance tax are supposed to increase in line with inflation. However, successive chancellors have chosen to freeze them at their 2021 level to generate revenue.
This decision has led to more estates being subject to inheritance tax as house prices, asset values, savings, wages, and inflation rise over time.
When Rishi Sunak was at the Treasury, he froze the thresholds until 2025-26, and in November, Jeremy Hunt announced that this policy would be extended for an additional two years.
Based on HMRC forecasts obtained through a Freedom of Information request, it is estimated that these decisions will impact 283,400 estates over a span of seven years. Out of these, 49,400 households would not have been liable to pay inheritance tax if the thresholds had increased in line with inflation.
Comparing the taxman’s figures compiled in March to the estimates published alongside the Autumn Statement, it is clear that the impact of the freezes is much larger than initially anticipated.
In November, the Treasury predicted that these measures would affect 248,100 families, with 13,400 new estates being drawn into paying the tax. However, by spring, HMRC estimated that the number of additional households affected by the freeze had increased by 36,000 to 49,400, nearly four times the original estimate.
HMRC attributes the significant increase in its projections to the fact that inflation has remained higher than expected.
In response to the FOI, HMRC stated, “You will note that the numbers have increased since the last time this information was published. This is because of the large upward revision to both the actual and forecast CPI inflation series, which is used to index the inheritance tax thresholds in the years where they are not maintained at their current levels.”
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