property prices

The effect property prices could have on Inheritance tax

What is Inheritance tax?

Inheritance tax (IHT) is a tax on the estate of a person who has passed away.  This includes their money, property and possessions. All UK residents have the option to pass over up to £325,000 (2021/22 tax year) of their estate tax free. This is known as the nil-rate tax band.

The standard IHT rate is 40% and this is only charged on the part of an estate that’s above the £325,000. However, if you leave your property to your children or your grandchildren, you may gain an additional tax-free allowance of £175,000.

It is also worth noting that if you are married or have a civil partnership, your partner can inherit your entire estate without having to pay an IHT bill. Your partner also inherits any unused IHT allowance when you pass away.

Rising property prices

The HM land registry reported that as of May 2021, there has been an annual property price rise of 10.0%, which now makes the average property in the UK valued at £254,6241.

There could be a few reasons as to why there has been such an increase in property prices. Back in March 2020, the property industry was forced to halt business due to lockdowns and restrictions. This caused a significant surge in buyers when restrictions were eased in the Summer. Another reason could be due to Rishi Sunak’s stamp duty holiday which he introduced last year.  Since June 2020, buyers have not had to pay any stamp duty on the first £500,000 of their purchase price. However, from 1st July 2021, the nil rate band will be £250,000 until 30th September 2021 and £125,000 thereafter.

The impact on IHT

With the rise in property prices steadily continuing, it could mean that the total value of people’s estates would exceed the tax threshold and leave many liable for an IHT bill.

Let’s face it, no one wants to be paying unnecessary tax, so there are ways to prepare for this now. These could include:

  • spending some of your assets now;
  • giving gifts to loved ones;
  • using a trust to hold some of your assets; or
  • leaving a charitable legacy.

Your pension can also help when it comes to IHT planning. This is because pensions are not subject to IHT, as they are not considered to be part of your estate, making them a very tax-efficient way to pass on your wealth.

To find out other ways to help you reduce IHT bills, download our Inheritance tax and gifting guide here.

Seeking advice

There are so many ways you could mitigate IHT and leave more behind for the people most important to you. The best way to start, is to speak to an expert who can help you create a plan based on your individual circumstances and priorities. Being prepared now, can eliminate stress for both you and your loved ones in the future.

If you would like to speak to one of our trusted advisers, please contact us here.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Foster Denovo Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate taxation and trust advice.

1- UK House Price Index for May 2021 – GOV.UK (www.gov.uk)