This article is written by:

Tony Sime

Partner at Downing

Wealth erosion can be constant and insidious. The damage builds over years: with prices rising faster than protections and thresholds fixed while asset values climb. Erosion of this kind does its worst precisely because it is silent.

The nil-rate band, the threshold up to which no Inheritance Tax (IHT) is charged on an individual's estate, has been held at £325,000 since 2009 and will stay there until April 2031. Frozen now for 22 years, the band would exceed £525,000 if indexed for inflation. Costs, obviously, have not been frozen. Inflation has driven a cost-of-living crisis in recent years, this has particularly impacted care fees, which can drain an estate before a penny of it is passed on.

What's most devilish is that the fiscal damage accumulates slowly enough that most clients don’t see it coming. Drip, drip, drip, constantly in the background, slowly filling (or, in this case, emptying) the bucket. Many clients are taken by surprise because there is rarely a single moment that sends someone to an adviser to ask what fiscal drag has done to their plans.

That makes the decline an advice problem and an advice opportunity at the same time.

Stealth by design

Seven times since 2010, successive governments have chosen to leave the nil-rate band untouched.[4] Each freeze has pulled more estates into paying IHT with no rate rise, no headline, nothing for a client to react to. This is revenue raised by inaction.

The freeze has quietly eroded roughly £200,000 of the effective tax-free allowance available to an individual before IHT applies. Tax on estates is now a major revenue driver for a government facing significant fiscal pressures: the Office for Budget Responsibility forecasts £8.7 billion for 2025/26 - another record year - climbing to £14.5 billion by 2030/31 under current policy.

There's very little evidence this trend will change. If anything, further measures could lie ahead. The latest Prime Minister, Andy Burnham, has hinted at further changes, saying in July that there was "some room for movement on tax," and that "at some point" the Government may have to "ask for a little more".

Who actually pays Inheritance Tax?

Around one in 20 deaths triggers an IHT charge today: 4.6% from the most recent HMRC figures. The OBR expects that to approach one in 10 by 2030/31. The Institute for Fiscal Studies, counting people rather than estates, has an even higher number: once a surviving spouse's later death is included, one in eight will face the tax by 2032/33, and close to 23% in London.

The headline rate is 40%, but few estates pay anything near it. Across all taxpaying estates the average effective rate is about 13%, once allowances, exemptions and reliefs are applied. This is a powerful reminder that the outcome is shaped far more by planning than by the rate.

Widows, widowers and surviving civil partners account for the largest single share of the tax, because the family estate is assessed in full on the second death - the point at which spousal exemption runs out and a lifetime of combined assets meets the frozen threshold.  

Receipts stay concentrated at the top, where a small number of large estates pay the bulk of the total - around 1% of estates account for roughly 65% of receipts. As more modest estates come into scope, the average bill is forecast to fall: from about £212,000 today toward £169,000 by 2027/28. As the tax reaches further down the wealth scale, the average individual charge shrinks.

Care costs reach the estate first

Care costs are climbing on their own schedule. Residential care now runs to around £73,000 a year, nursing care to about £81,000, and dementia nursing to roughly £82,000. People are living longer, enjoying more years with family, but also facing a greater likelihood of requiring expensive long-term care later in life.

Longevity serves as a multiplier. Four years in a care home costs more than £280,000; seven years can nearly empty the average estate. Self-funders feel it hardest, as they can pay several hundred pounds a week more than the rates councils negotiate for the same bed.

The state offers little cushion. The means-tested floor has stood at £23,250 since 2010; had it tracked inflation it would be nearer £30,000. The £86,000 lifetime cap on care costs, promised and repeatedly delayed, was cancelled in July 2024. Caroline Abrahams, charity director at Age UK, put the consequence plainly: "in the short term at least it seems they are on their own." The King's Fund judged that the government had "no plan to address the core issue in adult social care."

Reform is being examined, but slowly. The Casey Commission's first recommendations are due in 2026 and its report on fundamental reform in 2028, with any resulting change expected to phase in over the following decade. This will be too late for people planning today.

Access and tax-efficiency can work against each other

Two pressures can pull in opposite directions. Gifting under the seven-year rule, or moving assets into trust, surrenders access to capital a client may need in the future to fund care. Keeping that capital liquid and accessible leaves it exposed to 40% IHT on death. An effective plan has to hold both in view.

There's a trap in the middle: give assets away once care looks likely and a local authority can treat it as deliberate deprivation, assessing the client as though the money is still theirs. The gift is gone but the fees are still due. Good advice runs both in parallel, a realistic care cost against a realistic estate value, and then sequences the plan to keep options open as the client ages. The application of judgement to a moving picture is paramount.

There is a route that could ease this tension. Investments qualifying for Business Relief (BR) can become eligible for IHT relief after just two years - far quicker than the seven-year gifting clock - while the investor keeps ownership and control of the capital throughout.  

Should a client's circumstances change or care costs arrive, the capital remains within their control and there to draw on if needed. If not, it stays invested and can pass on with IHT relief applied. Some services also allow regular withdrawals, letting a portfolio provide a flexible, income-like drawdown while relief continues to build on what remains. This combination of IHT efficiency and retained control is difficult to replicate through gifting or trusts alone.

BR investments carry investment risk and can be more volatile and less liquid than mainstream holdings. Since April 2026, the 100% relief is capped at £2.5 million of qualifying assets (transferable between spouses) with 50% relief above, so they suit clients for whom that trade-off is understood and appropriate. For the access-versus-efficiency problem specifically, few tools address both sides at once.

Sequencing matters for pensions too, but here the old order has flipped. For years the orthodoxy was to spend other assets first and leave the pension untouched - the tax-efficient pot, drawn last or passed on whole. From April 2027, that breaks down: unused pension funds fall within the estate, so the pot that was the shelter becomes part of the exposure. Reinstating its efficiency now takes a deliberate strategy, not inertia.

Why your plan can't stand still

Few plans survive 20 years without revision. One drawn up around the turn of the millennium would have had every reason to assume a dynamic nil-rate band, manageable care costs and a pension passed on untouched. For reasons both political and fiscal, all three will have been rewritten: the bands frozen, care costs unbounded, the pension pulled into the estate. That plan wasn't wrong when it was written, it was simply never revisited.

That is the quiet danger running through all of this. Nothing announces itself: no letter arrives, no single event forces the issue, and an estate can erode for years before anyone thinks to look. The change is harder to spot than the one from a flip phone to the smartphone in a client's pocket, yet every bit as comprehensive and consequential.

Which is why your review has to be the one thing that doesn't pause either. Erosion continues whether or not anyone is watching, and stopping it takes someone who can see it happening and act while there is still something to protect.  

It is your opening as a financial adviser and, for the clients who never saw the chipping away for what it was, their best defence against it. In practice, that means revisiting exposure as thresholds freeze further out, pensions are drawn in and reliefs are recast. Reopening the conversation with clients before their choices narrow to the ones nobody wants. Downing's IHT Calculator is one straightforward way to put a number on that exposure and begin.

Important notice

Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.