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Inheritance tax payments are set to reach a record high

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

As a result of property price rises, the amount of inheritance tax paid by UK families is set to rise to record levels. Research by Saga Investment Services has found that the number of homes worth more than the current inheritance tax threshold has reached a record high.

After your death, the components of your estate will be passed out to the appropriate people following the wishes laid out in your will. However, before monies and properties can be released, inheritance tax must be paid on the value of your estate.

Inheritance tax is currently set at 40% for an estate value of £325,000 or above; for married couples or those in a civil partnership, the estate value threshold is set at £650,000. The new research found that more than one in four properties purchased so far in 2016 exceed the inheritance tax ‘nil-rate band’.

When the ‘nil-rate band’ was set at £325,000 and £650,000 back in 2009, only 13% of properties were liable to pay the 40% tax. This research by Saga has highlighted the need for a rethink of the ‘nil-rate band’ threshold and luckily April 2017 will see that much needed change.

To conduct their research, Saga analysed 105 postcodes across England and Wales. The area with the biggest property price growth, pushing many over the inheritance tax threshold, was London. Four out of five properties in central London, exceeded the threshold, up from 76% last year; while almost two thirds of properties in outer London were over the threshold, up from 55% in 2015.

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There has been a smaller rise in the number of properties exceeding the £650,000 limit, up to 5.8% from 5.4% in 2015. Unsurprisingly, the majority of the properties exceeding this higher limit are located in London, where a third of properties sold in central London this year exceeded the combined allowance limit.

As the tax thresholds were set back in 2009, they are out of date and inaccurate now after the year on year surge in house prices around the UK. In April 2017, the government has plans to introduce a new inheritance tax allowance for those planning to pass on their main home to a direct descendent, including children and grandchildren.

These changes will let an individual pass on £425,000 to those set to inherit, as long as this includes their main residence. As a result, married couples and those in civil partnerships will be able to pass on £850,000.

This new main residence nil-rate will rise by £25,000 each year until 2020. By then, the allowance will be £500,000 and £1million pounds for individuals and couples respectively. From 2021, the allowance will rise with inflation, measured by the Consumer Price Index (CPI). Any estates that exceed £2million will see the additional nil-rate set to £1 for every £2 above that £2million.

It can be difficult to get your head around taxes such as this which only apply on a one-off period but it is better to be prepared for the amount of tax your family and any other heirs are set to pay. If you need any further advice surrounding inheritance tax and wills, you should get in touch with an independent financial advisor (IFA) as soon as possible.

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