When the Inheritance Tax Act 1984 came into force, it replaced the Capital Transfer Tax Act 1984 and introduced a new framework for taxing wealth on death. Forty years on, its impact has grown significantly — largely because the nil-rate band has been frozen while property values have soared.
From Capital Transfer Tax to Inheritance Tax
Capital Transfer Tax (CTT) was introduced in 1975 and taxed all transfers of wealth — both during lifetime and on death. The IHTA 1984 replaced CTT with a more targeted tax focused primarily on transfers on death, with lifetime gifts becoming exempt after seven years. This was a significant shift that made lifetime giving a much more attractive planning tool.
The Frozen Nil-Rate Band: Fiscal Drag in Action
The nil-rate band was set at £64,000 in 1984. By 2009, it had risen to £325,000 — where it has remained ever since. Meanwhile, average house prices in England and Wales have more than doubled. This 'fiscal drag' means that many families who would not previously have been affected by IHT now find themselves with estates above the threshold.
The Introduction of the Residence Nil-Rate Band
The residence nil-rate band, introduced in 2017, was a direct response to the growing number of families caught by IHT due to rising property values. It provides an additional £175,000 allowance when the family home is left to direct descendants — a significant relief for many middle-income families.
HMRC collected a record £7.5 billion in inheritance tax in 2023/24 — up from £3.1 billion in 2010/11. The frozen nil-rate band and rising asset values mean this figure is expected to continue growing.
The 2024 Budget: A New Chapter
The 2024 Autumn Budget announced the most significant changes to IHT since 2017 — including reforms to business and agricultural property reliefs, and the inclusion of pension funds within the IHT net from April 2027. These changes will affect farmers, business owners, and anyone with significant pension savings.