Don’t be caught out by inheritance tax due to property price rise

Significant rises in the property market over recent years are pushing many people – perhaps unwittingly – into larger inheritance tax bills, according to Towry, the wealth adviser.

The nil rate band – a personal tax-free allowance on the value of an estate – of £325,000 was introduced in 2009. It will remain frozen until 2019 despite the resurgence in property prices across the UK, and the Prime Minister’s calls for the rate to be raised to £1m. For a single person, any assets above this threshold may be taxed at 40% on death.

Initially the freeze on the nil rate band did not attract much attention as the average UK house price at the start of 2009 was £195,000² and falling. Five years on, the market has recovered and the average UK house price now stands at £253,000³ – an increase of 30% on 2009. In London, the potential impact on an inheritance tax bill is even more marked with an average house price of £458,000.

With one in ten UK households sitting on assets totalling £1m or more?, the freezing of the nil rate band will see more money finding its way to the taxman if people do not take action to mitigate their potential inheritance tax liability. From a base of 17,000 estates paying inheritance tax upon the owner’s death in 2010-11, the current freeze on the nil rate band could bring in an additional 5,000 estates per year who are liable to an inheritance tax bill?.

Ian Dyall, estate planning expert, Towry said: “There are many steps that can be taken to mitigate your inheritance tax bill. The most extreme but obvious choice is to downsize your home, and then ‘gift’ the surplus money to children or grandchildren. Alternatively, you could choose to spend some of it yourself – it is there to be enjoyed!

“Many people prefer to keep a larger family home if they feel they have enough money to maintain their standard of living throughout their lifetime. If you wish to do this, there are a number of ways you can mitigate your inheritance tax liability, including:

a whole of life insurance policy - which generates a payment on death to cover any tax that may be due

putting money into tax-efficient trusts for future generations

gifting to charities – if you gift at least ten per cent of your estate to charity then the inheritance tax on the rest of your estate is reduced to 36 per cent.”

“Estate planning is a complex area and the solutions will be different for every individual or household. Therefore, it is important to seek expert advice in order to identify the best financial path for you and your family.”