How increasing property prices are catching more families in the Inheritance Tax net

Inheritance Tax (IHT) has become a growing concern for more and more families across the UK, particularly as rising house prices push estates over the threshold.

HM Revenue and Customs (HMRC) recently published statistics revealing that the number of estates caught by IHT continues to increase.

In the 2021 to 2022 tax year, 4.39 per cent of UK deaths resulted in an IHT charge, an increase from the previous year.

With the average tax bill for estates now standing at £215,000, more families are being left with tax burdens.

Despite these growing figures, the IHT threshold has remained frozen at £325,000 since 2009, meaning that any estate above this figure is potentially liable for tax.

With property prices continuing to rise, even modest estates are now being caught out, and many families are faced with unexpected tax bills.

How rising house prices are increasing IHT liabilities

For families in the £1 million to £1.5 million estate bracket, the IHT liability has become a big issue.

According to HMRC’s latest report, nearly a third of all estates impacted by IHT fall into this range, with an average tax bill of £325,000 for estates valued at £1.5 million.

With property values making up a substantial portion of many estates, more families are now crossing the £325,000 threshold and finding themselves liable for large tax bills.

For example, an estate worth £1 million will face an IHT bill of £155,000, but this figure more than doubles to £325,000 for an estate valued at £1.5 million.

This increase is particularly concerning for families who may not have available assets to pay the tax, especially when much of their wealth is tied up in property.

What could happen in the October Budget?

With the IHT threshold frozen since 2009, many are looking anxiously to the upcoming Budget.

There are concerns that IHT rates could increase, making the situation even more challenging for families and estates already on the edge of liability.

Any increase could have a severe impact, especially for those in areas where property prices have risen dramatically over the past decade.

The potential for changes to IHT makes it more important than ever for families to review their estate planning strategies.

With the likelihood of house prices continuing to rise, and the threat of an increase in IHT rates, many more estates could be pulled into the tax net, further increasing the tax burden on families.

What you can do to mitigate IHT

With IHT becoming an increasingly pressing issue, it would be wise to consider plans to avoid a hefty IHT tax bill, even if you currently don’t believe you are at risk of such liabilities.

While the Government has introduced some reliefs, such as the Residence Nil Rate Band (RNRB), these often don’t provide enough protection, particularly for estates valued over £1 million.

Here are some steps you can take to manage your IHT liability.

Make use of allowances and reliefs

The standard IHT threshold is £325,000 per individual, but with the RNRB, married couples and civil partners can benefit from an additional allowance of up to £175,000 when passing on their main residence to direct descendants.

This means that a couple can potentially pass on up to £1 million free of IHT, but careful planning is required to make full use of this relief.

Gifting assets during your lifetime

Gifts made to individuals during your lifetime can reduce the value of your estate for IHT purposes.

Any gifts made more than seven years before your death are usually exempt from IHT.

Regular gifting out of excess income can also be an effective way to reduce your estate’s taxable value.

Establishing trusts

Setting up trusts can help manage your estate and reduce your IHT liability.

Assets placed into trusts are no longer considered part of your estate, which can reduce the amount subject to IHT.

Trusts can also give you more control over how your assets are distributed after your death.

Life insurance

Taking out life insurance to cover your IHT liability can be a practical solution for some families.

This can provide the necessary funds to pay the tax without forcing the sale of family assets or property.

With more families being caught by IHT due to increasing property prices and the likelihood of changes in the October budget, it is definitely the right time to plan for the future.

Proper estate planning can make all the difference in reducing the tax burden on your estate and ensuring that your loved ones are protected.

If you’re worried about how IHT could affect your family or estate, our team of experts is here to help. Contact us today for more information.