Every year tens of thousands of grieving families pay inheritance tax (IHT) to HM Revenue & Customs. Their numbers will increase as the threshold is frozen until 2026, while house prices continue to spiral. Many who thought they were not rich enough to pay the hated death tax are in for a shock.
As we reported recently, the average inheritance tax (IHT) bill is already £210,000 and that is set to climb sharply.
IHT was originally targeted at the super wealthy but ordinary middle income Britons are getting caught by failing to plan or because the rules are so complex.
Shaun Moore, tax and financial planning expert at Quilter, said HMRC collected IHT totalling £3.6 billion collected between April and October 2021 alone. “This is £600 million higher than in the same period a year earlier.”
Moore said soaring house prices are a big factor behind the increase, with latest official data showing growth at 11.2 percent in the year to September.
That took the average house price to a record £270,000, up an incredible £28,000 on this time last year.
Yet the £325,000 IHT threshold has remained frozen since 2009, and will not increase for at least another five years.
This means the average £270,000 home would only need to increase by 20 percent over the next five years to breach that threshold an potentially incur an IHT bill. At current growth rates it would happen in just two years.
Average homeowners in London and the Southeast, where values are higher, may already be there. Other family assets such as savings and shares will also push them over the IHT threshold.
Moore said freezing inheritance tax threshold is a stealth tax. “It means more people will be facing IHT bills following the sales of their homes.”
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As well as the £325,000 allowance, homeowners can also pass on £175,000 free of IHT by using the main residence nil-rate band.
That means in theory people can pass on £500,000 of wealth, while married couples and civil partners could double that to £1 million with careful planning.
However, the £175,000 band only applies to those passing on their home to direct descendants.
HMRC defines this as “a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants”, such as a grandchild or great grandchild.
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Homeowners who pass on property wealth to anyone else will not be able to use the main residence nil-rate band. That means more of the wealth is vulnerable to IHT.
Married couples and civil partners can pass on their IHT allowances to each on death, but cohabiting couples cannot.
More than 3.3 million now cohabit and are at greater risk of paying IHT as Sunak’s IHT freeze drags on.
Ami Jack, head of national tax at Smith & Williamson, said the continuing year-on-year rises in IHT collections will be welcomed by the Treasury and it pays to be prepared. “Options such as making gifts and investing tax-efficiently may help reduce an IHT bill.”