Watch out for the IHT tax trap

Rising house prices and frozen tax thresholds will likely have tipped more estates into paying inheritance tax.

The IHT trip wire mainly catches estates in London whose wealth locked in property is almost double that of the average UK estate.

Around 4,190 estates paid IHT in the capital in 2019-20 – the latest year for which data is available from HM Revenue & Customs (HMRC).

The average London estate was worth. £1,439,141, comprising £464,396 as cash and securities and £820,163 as property.

Monitor property values for IHT

In comparison, the average UK estate was worth £1,160,478, with £448,136 of cash and securities, while the property was valued at £440,494.

The data was released by retirement advice firm Just Group, whose group communications director Stephen Lowe explained the data covers the period immediately before the COVID outbreak.

He pointed out that house prices skyrocketed from the start of the pandemic until recent weeks, with homeowners aged 55 and over benefiting from £1 billion of growth every day between March 2020 and June 2022.

“This is likely to have tipped many more estates over the IHT threshold, perhaps without the homeowners even realising. It is another reminder of why it is so important that people regularly assess the value of their estate, including an up-to-date valuation of their property,” he said.

How IHT impacts homeowners

The table shows average estate values for the UK regions between 2019-2020: Only estates in the North East averaged less than the £1 million nil-rate threshold triggering IHT.

RegionNumber of estatesAverage estate valueAverage value of securities and cash% of estate left as securities and cashAverage property value% of estate left as property
South East4990£1,244,489£430,23347%£604,47839%
East of England2540£1,188,976£414,81548%£524,27236%
South West2440£1,213,115£456,01950%£474,37232%
West Midlands1310£1,045,802£352,21253%£398,09531%
North West1540£1,077,922£454,07460%£336,80025%
North East371£929,919£357,14360%£307,42025%
Yorkshire & Humber982£1,262,729£542,29458%£388,74725%
East Midlands1070£1,252,366£516,98557%£383,80324%

UK average21372£1,160,478£448,13654%£440,49430%
Source: Just Group

Home ownership slated to fall

A separate analysis of IHT returns for 2021-2022 by estate agents Hamptons found three out of four probate grants included property, compared with 60 per cent between 2000 and 2010.

The agents argue that most people dying now reflects their age group buying homes since the Second World War, but the number will fall as upcoming generations struggle to finance buying a home as prices and mortgage interest rates rise beyond their means.

The research suggests around 80 per cent of inheritances are left by the 75 to 84-year-old age group, but fewer aged 85 or over leave property – mostly due to lack of affordability and selling assets to pay care costs.

IHT is not paid on 90 per cent of estates since their value falls below the standard nil rate band of £325,000 or £500,000 if the family home is left to children.

Bank of Mum and Dad closing

In 2021-22, around 200,000 homes worth £50 billion were passed on, suggesting an average value of £250,000, which sits below the IHT thresholds.

The report says: “The net result is that we may have passed the peak of property inheritance. In years to come, fewer people will leave a home behind. At first, this decline will be relatively slow before an acceleration brought about by the lower homeownership rates among younger Baby-Boomers and the generations that followed.

“The consequence of this fall in the total of properties bequeathed will be a drop in the number of people who become owner-occupiers thanks to parental property wealth.”

Inheritance tax FAQ

How much can I leave without paying IHT?

Inheritance tax rules are complicated, with different thresholds for paying tax depending on the circumstances.

Everyone has a nil-rate band of £325,000, but you may qualify for an extra nil-rate band of £175,000 if you pass the family home to children, taking your IHT-free total to £500,000.

Couples qualify for the standard and extended nil-rate bands, taking their combined allowance up to £1 million if the surviving spouse inherits from their partner.

Can I gift cash and property before I die?

Yes, you can ease the financial pain of IHT by gifting assets while you are alive, but some strict rules govern giving your money away.

Some gifts are tax-free, like paying up to £5,000 for a child’s wedding. Others come under ‘potentially exempt transfer’ or PET rules that have a sliding scale of tax to pay should you die within seven years of making the gift.

Can I legally avoid paying IHT?

There are legitimate ways of reducing the amount of IHT you might pay. The best way to plan for death duties is to speak to a tax advisor or accountant versed in IHT.

Where can I find out more about IHT?

HM Revenue & Customs publishes a guide to IHT on the government website. The pages explain how IHT works and detail the latest thresholds and tax rates. The information covers what happens when someone dies in or outside of the UK.

How much is the annual exemption?

You can gift up to £3,000 each tax year without paying IHT. The amount can be to one person or split among several people. Any unused exemption is carried forward and added to the next year’s allowance, giving a maximum of £6,000 for gifting.

Is paying someone’s living costs IHT-free?

You can pay someone’s living costs without impacting your other IHT gift allowances, provided the money comes from your regular income, and you can afford the payments after settling your own bills.

You can also combine gifts, adding the £3,000 annual exemption to the regular payment without triggering any tax.

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