Inheritance tax (IHT) is levied at 40% on estates worth more than £325,000.

However, individual homeowners can pass on properties worth up to £500,000 completely IHT free.

This is because on top of the nil-rate band (up to £325,000), there is also a main residence nil-rate band standing at £175,000.

Both these rates were frozen until April 2026, but they have now been extended to 2028.

By freezing the band at this level, increasing numbers of estates will be dragged into having to pay IHT as a result of increases to the value of other assets, such as housing.

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According to the Treasury, qualifying estates (couples) can still pass on up to £1m without IHT liability.

Accompanying documents to the Autumn Statement, read: “Qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1m without an inheritance tax liability. The residence nil-rate band taper will continue to start at £2m.”

‘Homeowners penalised by geography’

Kay Westgarth, sales director at Standard Life Home Finance, said that the government’s decision to freeze the IHT threshold for another two years was expected and welcomed by some.

However, she said that more people were finding themselves above this tax threshold when it comes to the value of their estates.

She explained: “Having set the nil-rate band at £325,000 in 2010, even the introduction of the nil-rate residential band in 2017 will not stop some ordinary homeowners from needing to pay inheritance tax.

“Indeed, older people in London and the South East who may have benefitted from a buoyant housing market are going to find themselves penalised by geography and worrying about what they can leave their loved ones.”

Over-55s need to look at allowances

She urged over-55s who think this would impact them to speak to an adviser to ensure they were “taking advantage of all their allowances to support their families when it matters the most”.

“Whether that is helping them get on the property ladder by releasing housing equity via a later life lending product or ensuring that couples use their full joint allowance, there are plenty of options to ensure that people aren’t unfairly penalized,” Westgarth said.

Ways to mitigate Inheritance Tax bills

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said that IHT used to be seen as a “wealthy person’s tax”, but a mixture of rising house prices and threshold freezes means that this is no longer the case and the latest freeze would “only make matters worse”.

She added that HMRC receipts for IHT in 2021 and 2022 were at an all-time high of £6.1bn and estates over this level faced 40% tax bills.

Morrissey said there were things that could be done to mitigate IHT bills, such as family gifts during a person’s lifetime, as gifts more than seven years before death are not subject to IHT.

She explained there is a gift allowance of £3,000 a year that falls out of your estate immediately for IHT purposes, and small gifts of up to £250 are also permissible.

Morrissey said: “You can also avoid IHT on gifts of any size if they are seen to be made from surplus income – this means you can make regular gifts out of your surplus income and as long as they don’t impact your standard of living then they will not attract IHT.

“However, this is subject to strict rules as gifts must be made on a regular basis and you will need to keep detailed records to ensure a pattern of regular gifting can be established.”