Average house prices in the UK rose by 5.5% in the year to February 2023, according to the latest official figures, taking the average price of a property to £288,000 across the UK. That is £16,000 higher than it had been a year earlier – and this surge in house prices has had wide-ranging consequences, most notably, pricing many people out of buying a property. This is even more apparent in certain property ‘hotspots’, such as the South-East of England.
But it is also having a huge impact on those who are already on the property ladder in one area that most homeowners may have overlooked – Inheritance Tax (IHT). The current IHT threshold in the UK is £325,000; if your estate falls below this amount then your beneficiaries have nothing to pay. There is also nothing to pay if you leave your estate to your spouse, civil partner or to charity.
If you are a homeowner when you pass away (even if your home is still mortgaged) and you decide to pass your estate on to your direct descendants (children or grandchildren), you will have an additional £175,000 added to your IHT threshold before your beneficiaries need to pay IHT. However, if the cost of your property is not far below the £500,000 threshold, the rest of your estate may take you over it, resulting in IHT needing to be paid. Any part of the estate over the threshold is subject to IHT at 40%, and as such it is recommended to structure your estate in the most tax efficient way possible.
Worryingly, the £325,000 threshold has remained frozen for more than a decade – despite soaring house price inflation over this period. As a result, more and more people are finding themselves liable to pay IHT, which has led to many labelling it a ‘stealth tax’. In fact, the government raised £7.1 billion from IHT during the last financial year, according to HM Revenue and Customs. This is £1 billion more than the amount collected in 2021-22. These figures will almost certainly reignite the debate about IHT and whether the current system is fair. At the same time, they highlight exactly why it is so important for people to get their finances in order if they wish to avoid getting caught up in the IHT net.
If your estate happens to be worth more than £2 million, you will lose £1 of your IHT threshold for every £2 that you are over £2 million. So, if someone’s whole estate (house and assets) was worth £2.5 million, their nil-rate threshold before IHT would only be £250,000.00. Everything above this would be subject to 40% tax.
The Treasury has insisted the “vast majority” of estates do not pay inheritance tax, saying that “more than 93% of estates are forecast to have zero inheritance tax liability in the coming years”. But with inflation remaining high and the inheritance tax threshold staying frozen until at least 2028, it is more than likely that more and more people will have to consider their IHT position more closely.
For most people, it is important that their home and assets (that they have worked so hard for during their life) are left to their loved ones. In this instance, it is vital you seek professional financial advice to mitigate IHT where possible.
Please get in touch with us if you have any questions about how to reduce your Inheritance Tax liability and we will be happy to discuss this with you.
