Let’s talk about Inheritance Tax (IHT)—the “gift” that keeps on taking. The nil-rate band (NRB), the amount of your estate that can pass tax-free, has been frozen at £325,000 since 2009 and will remain that way until 2030. Meanwhile, house prices and asset values have done anything but freeze. Add to that the residence nil-rate band (RNRB), currently £175,000, and we have a system that increasingly pulls more estates into the IHT net. But what do these bands mean, who gets them, and how do they work in practice? Let’s break it down.
What Is the Nil-Rate Band (NRB)?
The NRB is the tax-free threshold for your estate. Everyone gets one, and it’s transferable between married couples or civil partners if not fully used on the first death. So, if your spouse or partner leaves everything to you, their unused NRB can be passed along, effectively doubling your allowance to £650,000.
What Is the Residence Nil-Rate Band (RNRB)?
The RNRB is an additional allowance specifically for a family home left to direct descendants (children or grandchildren). It’s currently £175,000 per person and also transferable between spouses or civil partners.
But there’s a catch: if your estate is worth more than £2 million, the RNRB starts to shrink—this is known as the “taper”:
- For every £2 over £2 million, you lose £1 of RNRB.
- Estates above £2.35 million lose the RNRB entirely (£2.7 million for married couples).
The Impact of the Freeze
Let’s put this into perspective. In 2009, the average house price in North Yorkshire was £154,000. By 2024, it had jumped to £278,000—an increase of 80% (Office for National Statistics). With projections suggesting a further 28.8% rise by 2028, the average house price could hit £358,064.
Meanwhile, the NRB and RNRB thresholds haven’t budged, meaning more people are being pulled into the IHT net, especially those with modest estates. Food for thought: while your house value grows, so does HMRC’s interest in your estate.
A Case Study: Singleton Success
Let’s meet our hardworking singleton. In 2009, they bought a modest 3-bedroom house in North Yorkshire for £154,000. Over the next 15 years, they paid off their mortgage, built up £300,000 in savings, and enjoyed a quiet life. By 2024, here’s their position:
2024 Estate Value:
- House: £278,000.
- Savings: £300,000.
- Total Estate Value: £578,000.
Since their estate is below the combined £500,000 allowance (NRB + RNRB), there’s no IHT to pay—yet.
2029 Prediction: When IHT Hits
Fast forward five years. Thanks to projected property price increases of 28.8%, their house is now worth £358,064. Assuming their savings stay at £300,000, here’s their position:
2029 Estate Value:
- House: £358,064.
- Savings: £300,000.
- Total Estate Value: £658,064.
Now their estate exceeds the £500,000 allowance by £158,064, leaving the excess subject to 40% IHT.
Tax Bill:
- £158,064 × 40% = £63,225.
The Bottom Line
The combination of frozen thresholds and rising property values means that IHT will catch more estates over time. While it’s tempting to let out a sigh of despair, planning ahead can make a significant difference. As always, knowledge is power—so dig out those dusty documents, do your homework, and let’s get planning. After all, better to pay for the holiday of a lifetime than hand over a hefty cheque to HMRC!
