Rising house prices will drag more people into the inheritance tax (IHT) net in the coming years, experts have told The i Paper.
House prices are set to rise by 2 per cent by the end of the year, according to property website Zoopla, and will edge even higher in 2025.
Even “modest increases” will result in a steadily increasing number of estates being caught for IHT over the next few years, Ray Boulger, senior mortgage technical manager at brokers John Charcol, said.
It follows Chancellor Rachel Reeves’s decision to include any residual pension funds in the IHT calculation – a measure announced in the Autumn Budget – which will bring more estates into the net which otherwise would have been below the threshold.
IHT thresholds were untouched by Reeves on 30 October and will remain unchanged until at least 2030.
Currently, an estate could be liable for IHT if it exceeds the nil-rate band, which is £325,000.
If someone wants to leave their home to a direct descendent, they may also be able to use the residence nil-rate band, which can increase the value they can pass on to the beneficiaries free from IHT by a further £175,000.
For couples who are married or in a civil partnership, they may be able to combine their nil-rate band and residence nil-rate band with their spouse. This means they could pass on up to £1m free from IHT to their beneficiaries when the second of the two partners passes away.
Analysis of HMRC receipts data by Yopa show there has been a 32 per cent jump in the past decade to the number of local authorities where house prices are now so high that residents are liable for IHT purely because of the value of their home.
That amounts to 36 per cent of UK local authorities, up from just 4 per cent in 2004-2005.
Justin Moy, managing director at EHF Mortgages, said it’s “inevitable” that more estates will be liable for IHT in the coming months and years.
He said: “With up to £1m available to pass without inheritance tax in the right circumstances, it will still be the minority of properties directly involved, but when you factor other assets such as pension pots soon to be included in estates for tax purposes, there will definitely be more people paying inheritance tax in the near future.”
In the UK, IHT is charged at 40 per cent and although it is widely referred to as Britain’s most hated tax, the latest figures show it is paid by just over 4 per cent of estates – about 27,800 a year.
But under changes announced in the Budget, an estimated 10,000 more families are likely to end up facing an IHT bill when their loved ones die.
Elliot Culley, director at Switch Mortgage Finance, said those in London and the south are more likely to be affected as property prices tend to be higher.
He expects that the threshold will be increased over the next few years, or a rule introduced to protect those living in areas with particularly fast rising house prices.
Can I mitigate the impact of IHT or avoid it altogether?
It is possible to reduce the amount of IHT due when you die, so you can leave more to your loved ones, experts have told The i Paper.
Mr Boulger said making a will is a good starting point, if one hasn’t been made already.
It is the only way to ensure your estate is distributed in accordance with your wishes and it can be used to provide a legal framework outlining tax efficient methods to potentially reduce an IHT bill, he said.
After this, if you’re concerned about the impact of rising house prices, you should get an up-to-date property valuation, property expert Jonathan Rolande advised.
The valuation needs to be accurate to mitigate the risk of any delays or problems.
The simplest way of avoiding the charge is via the spouse or civil partner exemption rule which covers couples who are either legally married or in a civil partnership. It also covers partners who are separated, but not those who are divorced (or had their civil partnership dissolved) at the time of death.
The exemption means you can leave your entire estate to your spouse or civil partner and even if its value exceeds the nil-rate band, there’ll be no IHT to pay.
Your surviving spouse or civil partner can also ‘inherit’ your unused nil-rate band, which could effectively double their own threshold, allowing them to leave an estate of up to £650,000 before IHT becomes payable.
The transferal of your unused nil-rate band must be requested by the legal representatives of your spouse or civil partner, once they too have died.
You can also transfer assets into a trust or leave a gift to a qualifying charity in your will to help reduce your IHT bill.
A common way to ensure money stays outside of the IHT net is the seven year rule. This means that any gifts to people made seven years before death are not liable for the tax.
If you die before this time, the estate pays a sliding scale of tax known as taper relief. If the person making the gift died within three years it would be taxed at 40 per cent, but this rate falls in increments, so if they died six to seven years after making the gift, the tax rate would be 8 per cent.
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