Inheritance Tax: will your heirs be handed a bill?

After changes to tax rules, thousands of people no longer need to worry about Inheritance Tax (IHT). But the huge variation in property prices across the UK means that where you live and the average property price in your area will have a big impact on whether your estate will end up with a bill to pay.

The 'residence nil-rate band' was introduced in 2017 in response to rising property prices, giving individuals an extra £100,000 to pass on if their estate included their family home.

This led to IHT revenues falling for the first time in eight years, consumer group Which? reports. Government tax receipts show that just 3.9% of estates paid IHT in 2017-18, the first year of the allowance.

The new nil-rate band has been rising by £25,000 each year and this year it reached £175,000, allowing an individual to pass on a property worth up to £500,000 tax-free, and married couples and civil partnerships up to £1m.

However, an analysis of property sales and official IHT statistics by Which? shows that some areas of the UK will benefit more than others.

Figures for 2017/18 reveal that more than half (53%) of IHT revenue for England and Wales came from London and the South East alone.

Surrey is Britain's IHT capital, according to a report in the Daily Telegraph.

More than 1,100 families in the home county paid a total of £259m in IHT in 2017-18, the latest data available from HM Revenue & Customs. In fact, Surrey contributed more in IHT than the whole of Scotland, where 1,032 estates raised £209m.

Hertfordshire was the second largest contributor to the IHT coffers, paying £157m, followed by Sussex (including East and West Sussex) with a total bill of £155m, and Kensington and Chelsea, London's smallest borough, on £140m.

Perhaps it's no surprise that Kensington and Chelsea comes so high on the list, as 85% of properties in the wealthy borough sell for over £500,000 and 58% of properties sell for more than £1m.

From the next tax year, the residence nil-rate band will continue to increase but it will rise in line with the consumer price index (CPI) rather than in increments of £25,000. This is predicted to lead to more people paying IHT.

There could also be further changes to Inheritance Tax rules in the forthcoming Autumn Budget in the wake of Covid-19.

As Which? notes, although there are currently no indications that Chancellor Rishi Sunak will make changes to IHT, "it remains one of many levers he could pull to help recoup the cost of putting the country on lockdown".

There are several planning methods that can legally reduce or entirely mitigate Inheritance Tax liability, or provide for the liability cost effectively should it not be possible to avoid. These include spousal and gift exemptions, charitable donations, and various forms of business relief. At Fidelius, we'll help you build a realistic picture of your future financial commitments, so you can be confident that you can plan to mitigate IHT without prejudicing your future financial security. Contact us today to find out more.