Nil-Rate Band Freeze UK (2026): What the IHT Threshold Freeze Means for Your Estate

The nil-rate band (NRB) is the amount of any person's estate that is free from inheritance tax on death. It has been frozen at £325,000 per person since 6 April 2009: (1) THE HISTORY OF THE NRB: (a) 2008/09: £312,000; (b) 2009/10 to 2026/27 (and beyond): £325,000 — unchanged for 17+ years; (2) THE FREEZE EXTENSIONS: (a) the NRB was first frozen at £325,000 from 2010/11; (b) Spring Budget 2021: extended to 2025/26; (c) Spring Budget 2023: extended again to 2027/28; (d) Autumn Budget 2024: extended further to 2029/30 — the NRB will remain at £325,000 until at least 5 April 2030; (3) THE RESIDENCE NIL-RATE BAND IS ALSO FROZEN: the RNRB was introduced from 2017/18 and reached its maximum of £175,000 per person in 2020/21. It is also frozen — at £175,000 — until 2029/30. The combined RNRB and TRNRB (for a couple with qualifying property) therefore remains at £350,000 until at least 2030; (4) MAXIMUM THRESHOLDS FOR A COUPLE IN 2026: (a) NRB + TNRB = £650,000; (b) RNRB + TRNRB = £350,000; (c) COMBINED (if all allowances available): £1,000,000; (5) WHAT WOULD THE NRB BE IF UPRATED FOR INFLATION? If the NRB had been uprated with CPI inflation from 2009, it would be approximately £470,000-£500,000 in 2026. The 17-year freeze represents a real-terms reduction of approximately 30-35% in the threshold's purchasing power; (6) FISCAL DRAG: the freeze deliberately allows the NRB to fall in real terms as prices rise. Assets — particularly property — grow in value each year. If the threshold stays flat while values rise, a greater proportion of estates crosses the threshold. This generates additional IHT revenue for the Treasury without a headline rate increase.

The freeze has a measurable and growing effect on the proportion of estates subject to IHT: (1) IHT RECEIPTS — THE TREND: (a) 2009/10: £2.4 billion; (b) 2019/20: £5.1 billion; (c) 2022/23: £7.1 billion; (d) 2024/25 (estimated): £8.5 billion; (e) OBR forecast 2027/28: approximately £10 billion. IHT receipts have more than trebled in 15 years — driven by asset price growth against a frozen threshold; (2) PROPORTION OF ESTATES PAYING IHT: (a) 2009/10: approximately 2.6% of estates; (b) 2022/23: approximately 4.4% of estates; (c) OBR forecast by 2029/30: approximately 6-7% of estates. The freeze roughly doubles the proportion of estates paying IHT by 2030 compared to 2009; (3) WHY PROPERTY IS THE KEY DRIVER: the average UK house price in 2009 was approximately £155,000. By 2026, the average UK house price (England) is approximately £300,000-£310,000 (ONS). A couple who owned a modest house in 2009 (worth £180,000) may own the same house now worth £320,000 — which alone exceeds the NRB. Their entire estate may now exceed the threshold. In London and the South-East, the effect is even more pronounced: average house prices are £500,000+; (4) THE REGIONAL PATTERN: IHT is disproportionately concentrated in London and the South-East, where property values have grown fastest relative to the frozen threshold. HMRC data show that the South-East and London account for about 40% of all IHT receipts despite being 25% of the population; (5) THE PENSION CHANGE FROM APRIL 2027: the October 2024 Budget announced that from April 2027, unspent defined contribution pension pots will be included in the estate for IHT purposes. This will significantly expand the number of estates above the threshold — pension pots are often the largest financial asset held by a person in their 60s and 70s; (6) THE RNRB TAPER: the RNRB is tapered at £1 for every £2 of net estate value above £2 million. The taper threshold is also frozen, meaning that with asset price growth, more estates above £2m lose their RNRB.

The freeze makes IHT planning more urgent — estates that were previously below the threshold may now be above it, or will be by 2030. Effective planning requires using the available reliefs and exemptions: (1) ANNUAL GIFT EXEMPTION (IHTA 1984 s.19): £3,000 per donor per tax year — completely exempt from IHT. Can be carried forward one year (so £6,000 in the first year if the prior year's allowance was not used). Over 10 years, a couple can give away £60,000 completely free of IHT; (2) SMALL GIFTS EXEMPTION (IHTA s.20): £250 per recipient per year — exempt. Cannot be combined with the annual exemption for the same recipient; (3) NORMAL EXPENDITURE OUT OF INCOME (IHTA s.21): gifts that are part of the testator's normal pattern of expenditure, made from income (not capital), and do not reduce the testator's standard of living are exempt — with NO UPPER LIMIT. This is the most powerful exemption available. A retired person with a pension income of £60,000 and expenditure of £40,000 can give away £20,000 per year free of IHT using this exemption; (4) CHARITABLE GIVING — 36% RATE (IHTA s.24A): leaving at least 10% of the 'net estate' to a qualifying charity reduces the IHT rate from 40% to 36% on the entire taxable estate. For a taxable estate of £400,000, this saves £16,000 in IHT on the charitable gift of £40,000 — a net loss of only £24,000 to the estate but a tax saving of £16,000; (5) MAKING POTENTALLY EXEMPT TRANSFERS (PETS) EARLY: gifts made more than 7 years before death are completely exempt (IHTA s.7). Gifts made between 3 and 7 years before death benefit from taper relief. Starting the gifting programme early — even at modest amounts — reduces the estate methodically; (6) USING THE RNRB: ensure the will directs the family home (or part of it) to direct descendants to use the RNRB. For a couple, this provides up to £350,000 of additional threshold (combined) on top of the NRB/TNRB. A couple with a qualifying home worth £350,000+ and a will directed to children can achieve a £1,000,000 combined threshold; (7) FAMILY INVESTMENT COMPANIES AND TRUSTS: for larger estates, more sophisticated structures (family investment companies, discounted gift trusts, loan trusts) can reduce the estate. These require specialist legal and financial advice.

The combination of the NRB freeze and the incoming pension IHT change represents the most significant expansion of IHT liability since the introduction of the RNRB in 2017: (1) THE CURRENT POSITION (BEFORE APRIL 2027): defined contribution pension death benefits are paid at the trustees' discretion — usually outside the estate. They are NOT subject to IHT (unless the pension holder was over 75 and the benefits form part of their estate for technical reasons). Pension pots can be inherited IHT-free, making them a highly attractive estate planning vehicle; (2) THE BUDGET 2024 CHANGE: the October 2024 Budget announced that from 6 April 2027, unused defined contribution pension funds will be included in the estate for IHT purposes. The value of unspent pension pots will be added to the deceased's other estate assets — subject to IHT at 40% above the NRB; (3) THE COMPOUND EFFECT WITH THE NRB FREEZE: an individual whose estate was below the NRB threshold before April 2027 because their main asset was a pension pot may now have an estate well above the threshold. Example: estate of property (£280,000) + savings (£50,000) = £330,000 (below NRB of £325,000 — approximately IHT-free). Pension pot = £300,000. From April 2027: total estate = £630,000. IHT = (£630,000 - £325,000) × 40% = £122,000; (4) PLANNING BEFORE APRIL 2027: (a) draw down pension income rather than leaving it unspent — reduce the pension pot by spending it rather than leaving it for an estate; (b) consider pension annuity — converts the pot into income (no longer in the estate); (c) pension gifts to charity — the pension pot can be gifted to charity via pension trust nominations; (d) expressions of wishes: update them before April 2027; (e) review estate plan with a financial adviser who understands the impact of this change; (5) THE STILL-EXEMPT: (a) defined benefit (final salary) pension SPOUSE'S PENSION — a continuing income stream paid to the surviving spouse; this remains outside the estate; (b) death in service lump sums — these are paid at the employer's discretion; remain IHT-free if properly structured; (c) state pension — paid on National Insurance record; not an estate asset.

Raising the NRB is politically popular but has repeatedly been deferred in favour of using the freeze as a revenue-raising measure: (1) THE POLITICAL HISTORY: (a) 2007 Budget (Alistair Darling): announced the NRB would rise to £350,000. This was implemented to £325,000 in 2009 — then frozen; (b) 2015 Conservative Party manifesto: committed to raising the effective threshold to £1,000,000 for couples — achieved not by raising the NRB but by introducing the RNRB; (c) 2023/2024: various calls to raise or abolish IHT. The Autumn Statement 2023 and Budget 2024 left the NRB frozen rather than raising it; (d) 2030 as the current horizon: the freeze is legislated to 2029/30. Beyond that, the political and fiscal environment will determine whether the NRB rises; (2) WHAT A £500,000 NRB WOULD MEAN: (a) each person's threshold would rise from £325,000 to £500,000; (b) a couple's combined NRB threshold would rise from £650,000 to £1,000,000 (replacing the need for TNRB); (c) with RNRB (£175,000 each), the combined threshold for a couple would be £1,350,000; (d) IHT receipts would fall significantly — estimated £3-5 billion/year reduction; (3) PLANNING IN THE INTERIM: given the freeze is legislated to 2030, estates should be planned on the basis that the £325,000 NRB remains in place for the foreseeable future. The RNRB (£175,000) and the pension IHT change from 2027 are the two dominant variables for estate planning until 2030; (4) THE IMPACT OF NOT PLANNING: an estate of £650,000 (a couple; modest London home) with no planning pays approximately £0 IHT if both NRBs, TNRBs, and RNRBs are properly used (£1m combined threshold). The same estate with poor planning — not using all allowances, not directing the home to direct descendants, not using exemptions — might pay £80,000-£130,000 in IHT. The difference is planning, not luck; (5) KEY TAKEAWAY: the NRB freeze is a structural feature of English IHT that will remain in place until 2030. The response is to maximise use of the tools that ARE available — annual exemptions; normal expenditure from income; RNRB; charitable giving; and gifting within the 7-year period.