High house prices catch more families in the inheritance tax net

Property makes up a large part of the ‘death tax’ levied by the government in the most expensive places to live in the UK, new figures show.

Houses are the source of half of the estate tax paid on the average estate by families in London and 39 per cent in South East England, according to data obtained in a Freedom of Information request.

The thresholds above which beneficiaries start paying 40 percent estate taxes are among those frozen until 2028 in the government’s recent budget.

While few families generally pay estate taxes (see box below), the house price boom plus frozen thresholds is expected to drag many more families along.

Property prices have risen 22 percent over the past three years, according to the Nationwide house price index, bringing larger proportions of single-family homes in parts of southern England and other expensive parts of the UK into the inheritance tax net.

Inheritance tax is predicted to bring the Treasury nearly £7bn a year over the next six tax years.

It has long been known that people who inherit property in the South, particularly London and the South East – often because their loved ones live there for work or family ties – have to pay the largest sums in inheritance tax.

> 10 Ways to Legally Avoid Inheritance Tax: Read our guide

The data obtained from HMRC by financial services firm Just Group showed that property accounts for 50 per cent of the estate tax paid on the average estate in the capital.

London estates that had to pay it were worth an average of £1.44 million in 2019-2020, the latest financial year for which data was available.

In terms of the amount of home equity within estates paying estate taxes, London is followed by the South East, East of England, South West and the West Midlands.

In the rest of the mainland UK, property assets represent about a quarter of the estate tax paid on the average estate liable, while in Northern Ireland – where there are the fewest liable – it is 17 per cent.

“Cash and securities make up a much larger portion of estates in other regions, although significantly fewer estates are subject to estate taxes in these areas,” says Just Group.

“It suggests that high house prices in London and the South East have been largely responsible for more estates paying Inheritance Tax.”

The data in the table is from the period leading up to the Covid-19 outbreak, and house prices rose significantly during the pandemic, Just Group notes.

It is estimated that homeowners over the age of 55 benefited from £1 billion in property value appreciation every day between March 2020 and June 2022, it adds.

“This probably pushed many more estates over the estate tax threshold, perhaps without the homeowners realizing it.”

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“The portion of the estate that the family home represents is an important factor when it comes to reducing estate taxes,” said Ian Dyall, head of estate planning at Evelyn Partners.

Other assets, such as investments and even second properties, can be given away or transferred to a trust (although you should be aware of the tax consequences).

“However, it is difficult to give away the value locked up in your home in a way that is effective for alleviating inheritance tax.”

Dyall points out that if you continue to live in the property rent-free, it is likely to be seen as a ‘contingency of benefit’ and will remain part of your estate when calculating inheritance tax.

If you live in your home with your kids, it’s possible to gift them a portion of the property, and this is effective for reducing estate taxes, provided you pay a fair share of the bills, he says.

“But moving back in with the kids is usually a step too far for most people, even if there are tax savings.”

This is Money’s tax expert Heather Rogers explains the rules on gift and estate taxes to a reader here.

Laura Suter, head of personal finance at AJ Bell, says: “The recent rise in real estate prices means more people have to pay inheritance taxes.

“Many people who may not consider themselves wealthy, but who own property that has increased in value significantly, will find that part of their estate is subject to 40 percent tax on their death.

“It means that the tax has become a huge cash cow for the government. While property prices are expected to fall over the next few years, the Office for Budget Responsibility still expects estate taxes to raise nearly £7bn a year over the next six tax years.”

Suter says the problems are compounded because the thresholds at which you start paying haven’t risen since 2009, when the current zero rate band of £325,000 was set, while average property prices in the UK have risen from £156,000 to around £296,000 today.

Below, AJ Bell calculates what thresholds could have risen to if they had been raised in line with actual or OBR-projected inflation.

“Former Chancellor George Osborne tried to solve the problem by introducing the zero rate band for people passing on a house as part of their estate.” says Suter.

“But it’s so devilishly complicated and has some caveats that mean it’s not useful for a lot of families.”

Suter suggests that people who may owe estate taxes take advantage of gift rules, which move money tax-free from the estate to family or friends.

But she adds, “For people who are wealthy in real estate but poor in cash, it’s not always practical to give money away because they need the money to fund their lives.”

Carla Morris, financial planner at RBC Brewin Dolphin, says: ‘Continued rises in property prices, particularly in areas like London, coupled with a high inflation environment mean that the total value of many people’s assets is likely to continue to rise.

Meanwhile, zero inheritance tax rates have been frozen until 2028, a change announced in November that will be extended from 2026.

“This will ultimately mean that more estates will be subject to inheritance tax and even those who don’t consider themselves ‘wealthy’ may find their estates fall within this band.”

She says there are a range of additional exemptions and exemptions that can be used to lower the bill with careful planning, and it’s better to seek professional advice early on to ensure investments are made in a tax-efficient manner. structured.