Tools to slash bills as three times as many homes to be hit by inheritance tax

A house bought in 2022 is three times more likely to result in families being hit by inheritance tax than in 2009 when the levy was first frozen, research has found.

In 2009, just 13 percent of all property purchases (83,266 out of 625,205) in England and Wales cost £325,000 or more. However, this number more than trebled to 40 percent last year.

The analysis, which was carried out by law firms Shakespeare Martineau and Mayo Wynne Baxter, also found that Wales experienced the largest growth over the past 13 years, with 19 percent of properties sold in 2022 costing £325,000 or more, compared with just four percent in 2009 – an increase of 375 percent.

The East Midlands came second in the list (22 percent in 2022 compared with five percent in 2009), followed by the East of England (47 percent in 2022 versus 19 percent in 2009).

But with more than one in five people saying they do not ever expect to consider estate planning, according to a survey of 1,000 people by the law firms, they warn more families could find themselves being burdened by inheritance tax.

Fiona Dodd, private client partner at Mayo Wynne Baxter, said: “When modern inheritance tax, known as estate duty, was introduced in 1894, it was intended to affect only the extremely wealthy.

“However, the tax-free allowance has been frozen at its current rate for more than a decade, where it will remain until at least 2026 despite increasing house prices and inflation – bringing more families into the net.”

The tax-free allowance, also known as the nil-rate band, is the amount a person can pass on after death tax-free and has been frozen at £325,000 since 2009.

Ms Dodd continued: “As our survey shows, many people do not believe they will ever have to consider estate planning. However, rising house prices are swelling estate values and more properties are edging towards the £325,000 allowance – before possessions and money are even taken into account.

“The standard inheritance tax rate is 40 percent, which can eat into what is left behind, leaving families facing an unexpected and, potentially, large bill.”

If a main home is being left to children or other direct descendants such as grandchildren, people can take advantage of the residence nil-rate band, which increases a person’s tax-free threshold by £175,000 – taking the allowance up to £500,000.

However, the number of properties that were purchased for £500,000 or more in England and Wales in 2022 also more than trebled when compared with 2009 (18 percent versus five percent), according to the Land Registry’s price paid data.

The East Midlands reported the largest growth at 600 percent, followed by Yorkshire and Wales at 500 percent each.

Julia Rosenbloom, tax partner and chartered tax adviser at Shakespeare Martineau, said there are steps people can put in place to “mitigate” their inheritance tax liabilities and there are “lots of options” available to ensure as much wealth as possible passes to loved ones rather than HMRC.

Ms Rosenbloom said: “Tax is such a complex area and the key to success is taking early specialist advice. There are some basics everyone should look at, like making a will to ensure an estate is not shared according to pre-determined rules.”

She said that pensions can be a “valuable tool” when passing down wealth as the contents of a pension are not generally subject to inheritance tax, while donations to charity can reduce a person’s tax rate by four percent.

Ms Rosenbloom explained: “Any donations to charity given as part of a will are also not subject to inheritance tax. Donating at least 10 percent of an estate triggers a discount on the rate paid too, reducing it to 36 percent.”

There are other solutions that might be available to people depending on their circumstances. Ms Rosenbloom said: “Those wishing to make gifts while retaining control might consider using a trust or a family investment company, for example.”

Business owners may find that a substantial element of their wealth could be exempt from inheritance tax, however, the tax expert said the reliefs are subject to “very strict” conditions, and it is easy to trip over those conditions and fall into unexpected tax liability.

She added: “With a huge menu of options, anyone with a potential inheritance tax liability should take specialist tax and legal advice to ensure they are making the best of their situation.”