Inheritance Tax not just someone else’s problem
Property price inflation is pushing more and more people into the Inheritance Tax bracket, making advance planning more important than ever before
Inheritance Tax (IHT) can appear to be someone else’s problem – an issue only for the very wealthy. However, while it may appear to be a rich person’s tax, once the value of someone’s house, investments, savings and articles of value such as jewellery or antiques is added up, the potential reach of IHT extends to many.
The idea that it’s just an issue for the wealthy might be understandable given that the most up-to-date HM Revenue & Customs (HMRC) figures available show that only 2.9 per cent of all deaths in 2011-2012 led to an IHT charge, a figure comparable with previous years.
But the figure is rising. In 2009-2010, 14,723 estates were liable for the tax. The following year, 15,564 were in the IHT net and by 2011-2012, the figure was 15,976.
The amount raised is also increasing, from £2.4 billion in 2009-2010 to £2.6 billion the following year and £2.7 billion in 2011-2012. While it is not possible precisely to judge what has happened since then, it seems certain these numbers will have risen further still, especially when rising house prices are taken into account.
Inheritance Tax planning
Without the existence of widespread proper IHT planning, the numbers dragged into the IHT net would be higher still.
This is coming into sharper focus for more and more people thanks to rising property prices. According to HMRC: “Residential property makes up approximately a third of the total value of taxpaying estates and the ongoing rise in property prices has contributed to a rise in the overall tax take.
“At the same time, as the average value of estates rises, an increasing number…will now be valued over the IHT threshold (or nil-rate band) which has been frozen at £325,000 since April 2009.”
House price rises bring more into tax threshold
More than that, the current government intends to keep the rate frozen until 2016/2017. Meanwhile, the rate of house-price increases is picking up speed.
According to statistics from the Land Registry, all UK house prices rose by 7.1 per cent in the year to November 2014, with the average house price standing at £176,581 across the UK.
There were regional variations but the direction was the same – upwards.
- in the north-east, the rise was 1.8 per cent to £98,000
- in the north-west 3.1 per cent to £113,000
- in Yorkshire and Humberside it was 2.5 per cent to £119,000
- in the East Midlands 5.7 per cent to £132,000
- in the West Midlands 4.9 per cent to £138,000
- in East Anglia 9.5 per cent to £195,000
- London saw a 17.4 per cent rise, taking the average price to £461,453
- in the south-east, there was a 11 per cent increase to £239,000
- in the south-west prices increased 6.1 per cent to £185,000.
So the stage is set for “fiscal drag”, also known as “bracket creep”, as house-price inflation potentially pulls more and more estates into the IHT net.
Planning to pay an Inheritance Tax bill
Given that IHT is levied at 40 per cent of the taxable value of the estate, it could take quite a chunk out of any legacy.
Tax planning has never been more relevant for so many
In conclusion, two factors are threatening to push increasing numbers of people over the “frozen” IHT threshold: a return to rising house prices and a return to rising real, post-inflation, earnings, making cash legacies more likely.
Should interest rates start to increase once more, generating better returns on savings, the size of estates – thus their potential IHT bill – will grow further.
In short, Inheritance Tax planning has never been more relevant for so many people.
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Editor note: Article written by Zurich
This message was added on Wednesday 27th May 2015