UK households face £234,000 bill after being 'punished by stealth'

UK households face a £234,000 inheritance tax bill from the new Labour Party government due to the extended freeze on tax threshold. The main inheritance tax exemption, known as the nil rate band, has remained at £325,000 since 2009.

It will now stay frozen until April 2030 following Labour Party Chancellor Rachel Reeves's recent Budget announcement. The changes will potentially cost families significantly more in death duties compared to if the limits had risen with inflation, it is feared.

Charlene Young, pensions and savings expert at AJ Bell said: "Frozen tax thresholds punish taxpayers by stealth. When asset prices rise but thresholds fail to track inflation, the result is higher tax bills. Astonishingly, the main IHT free threshold won't have changed in over two decades by the time the freeze is lifted in 2030.

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"Although a new exemption has been introduced since then - the residence nil rate band - these figures show it actually doesn't compensate for frozen thresholds." Ms Reeves announced last week a two-year extension to the freeze on inheritance tax thresholds that will draw 4,300 new estates into the tax.

For an estate worth £2m a couple will have to pay £400,000 once both the nil rate band and the residence band have been accounted for, according to analysis by investment platform AJ Bell. The main resident nil rate band was introduced in 2017 in order to allow family homes to be passed on to descendants without incurring tax, however it has also remained frozen.

However, if both rates had been increased for inflation, the bill by 2030 would be £166,440, a saving of £234,000. Ms Young adds that for larger estates with a value of over £2m the story is even worse, since the residence nil rate band is gradually tapered away for households with cash and assets to pass on above this level.