Despite regularly being referred to as Britain’s most hated tax, Inheritance Tax (IHT) is widely misunderstood. According to a BBC report, fewer than 1 in 20 estates are liable for IHT, but for those that are, the rate is steep, usually at 40% of assets that exceed the nil-rate band.
But as house prices rise, could more estates become liable for IHT in the near future? Your home is likely to be one of your most valuable assets during your life. So, if you intend to keep it in the family rather than downsizing, price rises could mean that your estate tips over the threshold for IHT liability.
Read on to learn more about the current IHT rules and how to know whether your estate may be liable for the tax.
Your estate may be liable for Inheritance Tax if it exceeds the nil-rate band
Your estate could be liable for IHT if it exceeds the nil-rate band, which is £325,000 in 2024/25. If you leave your home to a direct descendent, you may also be able to use the residence nil-rate band, which can increase the value that you can pass on to beneficiaries free from IHT by a further £175,000.
If you are married or in a civil partnership, you may be able to combine your nil-rate band and residence nil-rate band with your spouse. So, as a couple, you could pass on up to £1 million free from IHT to your beneficiaries when the second of the two partners passes away.
If your estate could be liable for IHT, you might be able to reduce the rate of tax payable through charitable giving. If you leave a gift in your will equivalent to 10% or more of your estate’s net value to a qualifying charity, the rate of IHT charged on the taxable portion of your estate could reduce to 36%. So, as well as supporting a cause you care about, you could also help your loved ones by reducing a potential IHT liability.
Your planner can provide more information about mitigating a potential IHT bill on your estate.
House price growth has meant that, in some local authorities, your estate may automatically be liable for Inheritance Tax due to the rising value of your home
According to Zoopla’s house price index, the average price for a home in the UK in August 2024 was £267,100. This rose to £451,600 for a detached house. The report shares that, as of October 2024, house price inflation is 0.7% year-on-year, and average house prices are expected to rise by 2.5% by the end of 2024.
Today’s Wills and Probate confirms that there has been a 32% jump in the number of local authorities in which house prices are now so high that residents are liable for IHT purely because of the value of their home. That amounts to 36% of UK local authorities, up from just 4% in 2004/5.
It’s important to have an up-to-date valuation of your home and any other properties you own so that your planner can help calculate any potential IHT liability. If one exists, they can help you to create a plan to mitigate the IHT bill your loved ones could face after you pass away.
Look out for our Budget update on 30 October, as the rules for Inheritance Tax could change
Of course, with the new Labour government set to announce its first Budget on 30 October, the rules around IHT could soon change. The thresholds and allowances you’ve read about above are correct for the 2024/25 tax year as of 19 October.
We’ll be publishing a summary of the Budget and any changes after it has been announced. So, if the government decides to make any adjustments to the rules, rates, or thresholds relating to IHT, we’ll let you know as soon as possible.
Keep an eye out for our separate Budget update later this month. And, if you’re concerned about how any of the changes could affect you, please get in touch.
Our team of independent financial advisers in Lewes is here to support you in managing your wealth and achieving your long-term goals. This includes helping you to navigate any fiscal changes that may happen this year or in future years.
To find out more, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Production
