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BLOG: The inheritance tax net will continue to widen

Mortgage Solutions
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Mortgage Solutions

Jacqueline Almond and Catherine O’Reilly call for a greater focus on inheritance tax as property prices skyrocket.

Recent Treasury forecasts have revealed that recovering property prices combined with a freeze on the Inheritance Tax (IHT) allowance means that more people will become liable to IHT. The number of properties qualifying for the tax has increased by 50% over the last five years.

Inheritance Tax is levied at a rate of 40% above the threshold (or ‘Nil Rate Band’), with the threshold currently standing at £325,000 per person. It is important to note that no IHT is payable on transfers between spouses (except where the surviving spouse is not domiciled in the UK), with married couples (and those in civil partnerships) also entitled to transfer the remainder of their allowances to each other and thereby pass on assets up to a value of (currently) £650,000 without attracting IHT. The values of these thresholds have remained the same since 2009 and George Osborne has pledged that they will not change until at least 2018. Nevertheless, as the economy continues to strengthen and both house prices and the stock market rise, the value of more estates will rise above the Nil Rate Band and be subject to IHT.

According to data from the Office for National Statistics (ONS) and the Office for Budget Responsibility, an estimated 26,337 estates were charged IHT during the last financial year. This is projected to rise by 35% during the 2014-15 tax year.

It is no longer the case that only very wealthy people are affected by IHT. Homeowners in London and the South East accounted for at least half of the UK’s total IHT revenue in 2010 to 2011. The latest figures from the ONS state that property prices in London rose by 20.1% in the year to May. The average price is now £492,000; well above the IHT threshold.

The north London borough of Barnet has been hit hard by the rise in property prices, with 240 people paying IHT in 2010-11 (the most recent time period available). While Barnet did not have the costliest properties in London – in 2013-14 58% of homes were sold at £325,000-plus compared to 96% in Kensington and Chelsea – it did have an older and less transient population than other areas. These statistics are not entirely surprising – the population of Barnet is likely to be made up of homeowners who have remained in their property for several years as it has grown in value and their liquid assets may be more modest. A larger percentage of the residents of Kensington and Chelsea are domiciled outside the United Kingdom and although the Government has taken steps to increase their exposure to the tax, they may have more options available to them to mitigate any liability.

Nevertheless, as property prices continue to grow around the country, more people are likely to be affected by IHT. Careful planning and legal advice is essential. It is important that you continue to keep track of the value of your estate, as well as consider what will happen to your assets after your death. Assets can be transferred between spouses tax-free, while the estate of the second spouse to die can benefit from the unused Nil Rate Band of the first, up to 100%. From a tax perspective, it may also be advisable to consider making certain gifts during your lifetime to reduce the value of your estate on death.

If you are concerned about how rising house prices may impact upon your estate and inheritance plans, it is vital to seek advice. However, the family home is the most difficult asset to use for tax planning and again the options have been restricted by recent Governments.#

Jacqueline Almond is a partner at IBB Solicitors. Catherine O’Reilly is a trainee solicitor at IBB Solicitors.