Will the taxman help himself?

The growing cost of housing across the UK is making many of us much wealthier – but does it mean we are in danger of becoming subject to inheritance tax?

Only around 4% of deaths in the UK result in an inheritance tax bill. Just over 24,000 families paid the tax in the 2017-2018 financial year. The number may even have fallen a little since then. In 2019-2020, inheritance tax receipts totalled £5.2bn, says HM Revenue & Customs, a 4% drop.

But Inheritance tax bills now look set to rise. At Continuum we are asking whether your family will be caught out and what you can do about it.

How inheritance tax works

Inheritance tax, often referred to as IHT, is due on estates, which is everything of value that you leave behind, from the cash in your current account to your home and its contents.

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However, the first slice of your estate is covered by the “nil-rate band”. This is currently £325,000 and for many people in the past this was high enough that they had no IHT liability.

There are some other valuable concessions.

  • A spouse or civil partner never has to pay IHT on an inheritance. The need for a formal marriage or civil contract has prompted deathbed marriages in the past.
  • Couples are instead allowed to pool their nil rate bands. This enables them to leave £650,000 of assets to heirs with no tax to worry about.
  • There is also a “main residence band” covering your home. This raises the total nil-rate band to £500,000 – and so to £1m for couples. This was phased in between 2017 and 2020, and why IHT receipts have been falling during that period.

However, anything outside these concessions is currently taxable at a rate of 40%.

The number of people expected to pay IHT over the next five years is expected to rise, with official projections that the tax will raise £6.3bn by 2023-2024, up roughly 20% on five years previously.

A growing problem

Despite the apparent forbearance of the taxman, more and more people may be caught out by IHT.

Rising house prices are leaving more of us with wealth. The £1million plus home used to be an exception, and probably a mansion. It is already the norm in many London streets, and the current rocketing housing market could see it becoming much more common across the country.

It means that many more estates will be subject to tax, and that many more beneficiaries will be forced to sell the family home they hoped to inherit to pay off their IHT liability.

Keeping the taxman at bay

You need to value your estate.

What you own includes the value of your home and any other property you own, your savings and investments, including those which are free of other taxes such as ISAs and any money owed to you, such as pensions paid in arrears.

For anything you own jointly, you just count your share – if you are married or in a civil partnership, this is assumed to be 50%. Subtract any debts outstanding, such as mortgage borrowing still to be paid off, outstanding credit card balances and personal loans. Bills also count, as does any income tax you owe.

At the end of this process, you should have an estimate of the current value of your estate – and If it exceeds the £325,000 nil rate band, or the £500,000 threshold if you own your home (£650,000 or £1m for couple) you should be able to work out your liabilities.

Remember the value of your assets – particularly your home, savings and investments – is likely to rise in the years to come. As a result, IHT may become an issue for your beneficiaries even if it is not a concern today.

The good news is that even those families who do face a potential liability can take perfectly legal steps to reduce the final bill, or even avoid it altogether.

There are several ways to do this. Putting cash, property or investments into a trust can mean they fall outside of your estate for IHT purposes if you live for at least seven more years.

A whole of life insurance policy can deal with IHT. Take out a policy in trust, and your executors can use the proceeds to pay off the IHT bill. Obviously, the younger you are when you take out the policy, the less it will cost. You should also make a will – but above all remember that IHT can be complicated and expert advice is essential.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable inheritance tax strategy, you should seek independent financial advice before embarking on any course of action.

The Financial Conduct Authority does not regulate estate planning, wills, tax and trust advice.

While investing your capital is at risk.


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