UNREAL ESTATES: FLUCTUATING HOUSE PRICES AND STATIC IHT THRESHOLDS

According to the age-old saying, “an Englishman’s home is his castle”.

For many individuals, it also represents their principal asset – and, what is more, an asset which has appreciated significantly in value in recent decades.

In the last couple of weeks, the Land Registry published figures showing that the average house in the UK rose by 13.6 per cent in the year to August to just under £296,000 (https://www.gov.uk/government/statistics/uk-house-price-index-for-august-2022/uk-house-price-index-summary-august-2022).

Taken on face value, that might be regarded as nothing but good news for homeowners. However, it is something of a double-edged sword for many households.

Rising property values mean that an increasing number of families find themselves faced with the prospect of paying Inheritance Tax (IHT).

It is particularly true given that whilst the price of a home has increased, the threshold at which IHT becomes liable has remained static.

The last time that the Nil-Rate Band – the limit below which estates are exempt from paying IHT – changed was in 2009, when it moved from £312,000 to £325,000 (https://www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates/inheritance-tax-thresholds-and-interest-rates).

In that time, the price of the average home in the UK has almost doubled. Of course, many houses in many parts of the country are now worth far more than average property values and, therefore, above that IHT threshold.

There is, I should point out, something called the Residence Nil-Rate Band which provides further relief of up to £175,000 when a family home is handed down to children or grand-children (https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band).

A surviving spouse can inherit the allowances unused by their late husband or wife, so some married couples can pass on a combined £1 million free of IHT but – be warned – it doesn’t apply to everyone.

If that picture isn’t complicated enough, it’s worth considering the circumstances of those who die without making a will.

One of the most recent studies concluded that almost two-thirds (59 per cent) of adults in the UK had not done so (https://www.canadalife.co.uk/news/31-million-uk-adults-don-t-have-a-will-in-place/).

Where that is the case, a different set of rules – intestacy rules – come into effect.

It means that if married parents leave estates worth in excess of £270,000, that sum goes to their surviving spouse with the remainder split equally between the spouse and any children.

Anyone reading all that will now understand just from an administrative point of view how drawing up a will makes the whole process so much simpler.

That headache is compounded, however, by the substantial financial cost associated with a lack of estate planning.

In the three months to the end of September, HMRC received a record £3.5 billion in IHT, up £400 million on the same period in 2021 (https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-monthly-bulletin#inheritance-tax-iht).

If that annual increase seems impressive, a quick look through the Revenue’s own data reveals that IHT income has almost doubled in the space of less than a decade – up from £3.14 billion in 2012-’13 to just over £6 billion last year.

The failure to make adequate plans for what happens when we die is common to all incomes and social demographics.

We regularly deal with sizeable estates which have not done so. One recent case resulted in a £3.5 million cheque being written to the taxman.

Some individuals opt to handle such planning themselves.

Unlike experienced probate lawyers, though, they may not be aware of reliefs which might reduce an IHT liability – and, perhaps unsurprisingly, HMRC isn’t going to tell them.

For instance, if you own a property with someone other than a spouse who has died, you may be eligible for a 10 per cent IHT discount on that property valuation.

If someone lives in that property, the discount can be 15 per cent because occupancy makes the house more difficult to sell and, therefore, realise a full IHT liability.

Even if the probate process is already completed, discounts can be obtained retrospectively but that must be done within two years of someone’s death.

Inheritance tax is now a big earner for HMRC and, given the ever-increasing sums which it generates, the prospect of it being reformed – in the short-term, at least – is “vanishingly small”, according to some commentators (https://www.telegraph.co.uk/tax/news/record-inheritance-tax-haul-treasury-property-market-soars/).

In light of that fact, it quite literally pays to plan ahead.

As many families have found, the loss of a loved one can be aggravated by a maze of probate paperwork and the need to hand over large amounts of cash to the taxman.

ENDS