Don’t get caught in the IHT trap as property prices soar

13th May 2014

Rising house prices may be good news for homeowners now but it may become a problem in the long-term if they fail to consider the impact on inheritance tax (IHT).

Research by Lloyds shows total household wealth has increased by over £3 trillion, or £96,000 per household, in the past decade to just under £8 trillion. While this wealth is a combination of all assets – including savings, investments and pensions – housing wealth has grown 58%, or £1.22 trillion, since 2003.

In the past year household wealth grew at the fastest annual rate in the decade, ramping up by £717 billion.

Despite this rapid up-tick in wealth and soaring house prices, which have increased 10.9% across the UK and 20% in London in the past year based on Nationwide’s data, the IHT threshold has been frozen since 2009.

The threshold, or ‘nil-rate-band’, is currently £325,000 and estates that are worth this amount or less do not suffer 40% IHT. For estate worth in excess of £325,000, the value over that limit is taxed at 40%. For married couples and those in civil partnerships the threshold is effectively £650,000 as the nil-rate-band is transferable on first death.

Although the Conservative’s set out plans for a £500,000 per person nil-rate-band, effectively £1 million per couple, in their 2010 manifesto there has been no change in the threshold for five years.

Ian Dyall, estate planning expert at financial adviser Towry, said more families would unwittingly find themselves faced with IHT bills as the threshold fails to keep up with house prices.

He said the freeze in the threshold did not ‘attract much attention’ in 2009 as the average property stood at £195,000 and prices were falling but the average home now costs £253,000 and in London the average property – at a cost of £458,000 – is already in excess of the threshold.

Dyall predicted an extra 5,000 estates could be brought into IHT each year from a current base of 17%.

What can you do?

For homeowners worried about being caught in the IHT trap because the family home has shot up in price, there are options to reduce the bill. The most extreme is to sell the property and downsize, said Dyall.

He said the excess money can be gifted to friends and family but individuals must be careful about how much they give away. Every person can give away up to £3,000 each year as gifts plus extra sums for special occasion like weddings. This amount can be exceeded if it can be proved that a regular gift is a normal expenditure outside of a person’s income.

Large one-off gifts over £3,000 fall outside of IHT after seven years, and until this point are ‘potentially exempt transfers’ that will suffer IHT should the gift giver die within seven years.

Alternatively individuals can buy a whole-of-life insurance plan to cover the expected IHT bill so their estate passes on to their family without any reductions. Money can also be ring-fenced in trusts for future generations and money can be passed to charities.

Gifting money to charity has a large IHT benefit; those who gift 10% of their estate to charity pay a reduced rate of 36%.

‘Estate planning is a complex area and the solutions will be different for every individual or household,’ said Dyall. ‘It is important to seek expert advice in order to identify the best financial path for you and your family.’


1 thought on “Don’t get caught in the IHT trap as property prices soar”

  1. Noo 2 Economics says:

    The excess over the £325000 threshold which is gifted to charity attracts full exemption.

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