While this April sees many changes to the UK’s tax regime; a lower threshold for additional-rate income tax, a lower threshold for capital gains tax, and a higher rate of corporation tax, to name a few, the inheritance tax nil-rate band remains the same. It is intended to stay frozen at £325,000 until at least 2028.
Though there’s been no change to the nil-rate band (NRB) since 2009, property prices have risen meteorically in the same period.
That’s great news for HMRC, as government data shows that an all-time high of £6.1bn in inheritance tax (IHT) was collected in the 2021/22 tax year. It’s not so great for those hoping to pass on their family home. If your home is worth more than £1 million, you risk leaving your loved ones with a costly IHT bill unless you take steps to mitigate the impact.
Why are £1 million-home owners at risk?
If your total estate is within the £325,000 threshold, it can be passed on free from inheritance tax. There is also an additional residence nil-rate band (RNRB) of £175,000, which applies when passing on the property you lived in to one or more of your direct descendants.
Since married couples and people in civil partnerships can share these allowances, most couples can pass on up to £1 million without incurring an IHT charge, assuming they will pass on their home to their children or grandchildren.
However, if your total estate is above £2 million, your property allowance will be tapered. For every £2 by which your estate exceeds £2 million, your RNRB is reduced by £1. For example, if your estate values £2,100,000, your RNRB would be reduced by £50,000 (to £125,000).
How many homeowners are affected?
These days, many people live in homes worth more than £1 million. Our analysis of the latest available Land Registry data shows there were 26,783 £1 million-plus house sales in 2022.
Naturally, most of these properties are in London and popular commuter towns such as Guildford, Twickenham, and Tunbridge Wells. Other areas with a high concentration of £1m+ properties include Edinburgh, Bournemouth, Bristol, Birmingham and Exeter.
Investec’s Faye Church says: “Our analysis highlights that thousands of people are liable to pay inheritance tax on their properties because of their value, and these people should seek professional financial advice on how to plan for this.”
Could downsizing be the answer?
We’re seeing a rise in the number of clients who are downsizing as a way of managing IHT, i.e. moving to a smaller home that can be passed on within your personal IHT threshold. Of course, this still presents the issue of how to pass on the balance of the sale to your loved ones.
Faye says that many people “will be looking to invest the money they have made on their property sale and would benefit from specialist support on managing their wealth.”
“We are also seeing parents and grandparents that have decided to downsize for lifestyle reasons, reaching out to us to help them put a strategy in place for what to do with the proceeds, be that to gift, invest or spend.”
How can a financial planner help you?
The amount you’re able to pass on IHT-free depends on the overall value of your estate and who you leave it to. Since it’s specific to you, IHT advice is different for everyone. So, for personal advice, you should speak to a financial planner who understands your situation and can help to arrange your finances accordingly.
At Investec, we work closely with individual clients to plan and manage their wealth, including mitigating their potential IHT liability. With local offices all over the UK, we use a relationship-based approach to financial planning and investment management. Our goal is to make a tangible and meaningful difference to our clients and their families.
Please get in touch if you’d like to speak to one of our financial planners today.
The information contained in this publication does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action.
Tax treatment depends on individual circumstances and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change.
With investment your capital is at risk. The value of investments can go down as well as up and you may not get back the full amount invested.