Posted on 8th November 2013

House Prices Pushing up Numbers Subject to Inheritance Tax

By Martin Williamson, Head of Residential Property, Latimer Hinks Solicitors

House prices are rising at their fastest level in years however, rather incongruously, the Inheritance Tax (IHT) threshold has remained rigidly fixed.

The current level of £325,000 per person is expected to remain until at least 2019. All estates above that limit are taxed at 40 per cent. This poses some interesting, and worrying, questions, particularly in the current legislative climate. Help to Buy, which is enabling people to buy houses up to the value of £600,000 could arguably lead to a house price spike. A housing boom is less likely outside the environs of the capital, however the scheme will, inevitably, put prices on an upward trajectory.

The figures, unfortunately, speak for themselves. The taxman's IHT receipts have climbed for the third year in a row, according to official figures, and many homeowners are now being forced to prioritise reducing their tax liabilities. The IHT threshold has been frozen since 2009 which has meant property prices have a major effect on rises and falls in the level of IHT being paid to the Government. Revenues reached their highest level of £3.8bn during the housing market peak of 2007-08, before falling back when the market crashed. For the tax year which ended in April 2013, IHT income was £3.1bn, according to the Office for National Statistics; up from £2.9bn the previous year.

While the IHT rate remains fixed, many people - or rather their estates in that their families/beneficiaries will pay the tax - will increasingly find themselves the subject of this tax for the first time. However, there are ways to mitigate the impact of IHT by following a few straightforward rules of thumb:

Knowledge is power

Find out what your property is worth, as it may have passed within the ambit of IHT by a whisker. Without some clear idea of the value of an estate, or how that value is spread across housing or other assets such as savings, families cannot plan.

Plan ahead

An up-to-date will is vital to the planning process. Problems generally materialise where a surviving spouse or a single person dies. A valuable concession allows ones spouses unused tax-free allowance to be transferred to the survivor. So executors of a surviving spouse can add the unused percentage of the allowance of the first to die (up to 100%) to their own allowance. At todays threshold, this permits each couple to leave £650,000 tax-free (subject always to deduction of the value of gifts made within seven years of death).

Start giving it away

When it comes to house purchases we all know about the increasing popularity, and necessity, of the Bank of Mum and Dad. Early planning from a tax perspective could be worth considering.

If the parent making the gift dies within seven years of making the gift, then the gift is added to the value of the deceaseds assets and tax calculated on the total. These possibly taxable gifts are known as "potentially exempt transfers. There is however a £3,000 per person annual exemption deductible from the amount of the gift.