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Climbing the inheritance tax ladder

Updated 30 January 2023

5min read

Nick Green
Financial Journalist

It’s not just house prices that are rising every year. Also increasing is the number of people whose families will have to pay inheritance tax. Are you being drawn into the net without knowing it – and if you are, what can you do to protect your family from a hefty bill?


Most people never think about inheritance tax (IHT). After all, it was designed to tax the very wealthiest – and that’s not most people. But this was before a series of housing booms turned increasingly ordinary houses (or even flats) into ‘millionaire homes’. It’s now possible to be living in what was once a very modest home, which can now attract a high price – and the beady eye of the taxman.

The number of UK families now subject to IHT is at its highest level for 35 years, and the number has tripled in the past six years alone. Roughly one in ten estates are now hit by it, yet only five per cent of people seek professional advice on IHT[1]. This suggests that half the people who are subject to this tax do not get the advice they need.


The result is that the amount of money lost unnecessarily to IHT is rising year by year. Tax wastage through this ‘death tax’ rose from £550 million in 2015 to £595 million this year[2], mainly due to rising house prices while the ‘nil-rate band’ (the amount of tax-free estate) remained unchanged at £325,000 per person. Consequently, the UK’s tax take from IHT has risen by £1.5 billion since 2012/13.

This graph shows how the price of the average UK house continues to climb higher and higher towards the top of the nil-rate band.


But what about the new allowance for family homes?

You may have heard that the government is introducing a new allowance to protect family homes from IHT. Introduced from April 2017, the ‘main residence nil-rate band’ will protect an additional £100,000 per person, applying only a primary residence passed down to a direct descendant (or legally adopted child). This amount will rise yearly, to reach £175,000 by April 2020.

This means that, from April 2017, a couple could use both their nil-rate bands (£325,000 each) plus their main-residence nil-rate bands (£100,000 each) to pass a family home worth up to £850,000 to their children tax-free. This will certainly be welcome news to many families.

However, prior to the new allowance, the same couple (let’s call them Bob and Marion) can only bequeath £650,000 of assets in total before IHT must be paid. Furthermore, the price of many homes is now so high that even the main residence nil-rate band will not entirely protect families from this tax.

The fast-moving IHT goal posts

According to a 2015 study by property site Zoopla, Britain now has more than 620,000 million-pound homes, and the number of ‘property millionaires’ is rising by more than 200 per day. One in 50 homeowners has a property worth over a million, rising to 1 in 8 in London.

If we suppose that Bob and Marion’s home is now worth exactly £1 million, and both die after April 2017, how much IHT would their children have to pay?

Bob and Marion’s nil-rate bands cover the first £850,000 of the home. The remainder (£150,000) will be taxed at 40 per cent – making a bill of £60,000. This assumes no other assets – no savings, no cars, no other valuable assets. Assuming there would be at least some of these, all of them would have to be valued and then taxed at the same rate of 40 per cent.

When does IHT have to be paid?

This can be the really troublesome part. HMRC requires IHT to be paid within six months of the person’s death. Now, assuming the person left a formal will, and that their affairs are fairly simple, then the probate process (by which the wishes in the will are carried out) should be completed by this time. But note that word ‘should’. It is not at all uncommon for probate to take longer than six months, and if the estate is large and complex, or (worst of all) the person has left no valid will, then it’s highly unlikely that the estate will be distributed before the six months are up.

But HMRC will still want paying, whether the family has inherited the money or not. In the case of Bob and Marion above, their children would face a bill of at least £60,000 – and would have to find this money out of their own pockets.

It’s possible to pay IHT using a bank loan (banks are used to this kind of situation) or in instalments, but in both cases you’d end up paying interest on the money. At the very least, IHT can cause a serious cash flow problem at what will already be a difficult time.

What if I have no children? Or no partner?

Not everyone with a house to bequeath will have children to inherit it. In this case, the main residence nil-rate band will not apply, so each homeowner would have only £325,000 of nil-rate band to use up before their beneficiaries have to pay tax. For instances, a childless couple who want to leave their estate to nephews and nieces would only be able to shelter £650,000 of it – their relatives would have to pay 40 per cent tax on the rest.

Having no partner can also be an issue. If you are widowed, then you will inherit your spouse’s nil-rate band (bringing yours up to £650,000). However, if you are divorced this doesn’t happen. So a divorced single father, leaving his house to his children after April 2017, would have a total nil-rate band of £425,000 (that’s £325,000 plus the £100,000 for a family home). But in more than half of London’s postcodes, the average property now costs in excess of £500,000. This would leave £75,000 exposed to IHT – a tax bill of £30,000 on the property alone.

What can I do about inheritance tax?iht-checklist-thumbnail-new

The first thing to do is work out your estate’s potential exposure to IHT. You can do this using the Unbiased IHT checklist. (Note that this doesn’t include the main residence nil-rate band, available from April 2017.)

If you think your family or other beneficiaries might have to pay an IHT bill after your death, the best thing to do is seek advice. An adviser can show you ways to legitimately reduce the size of your taxable estate without breaking any rules or incurring any unforeseen consequences.

It’s crucial to take advice before embarking on any IHT-reducing plans yourself. For instance, some people transfer ownership of their homes to their children, believing this will solve the problem. Often it doesn’t, and in fact can lead to even greater complications and tax issues for everyone involved. An adviser can ensure that any action you take is both legal and effective.

You can find your adviser using the Unbiased smart search.


[1] The Advice Nation 2017 report by Unbiased and Opinium.

[2] TaxAction 2016 research by Unbiased and Prudential

Prudential CMYK

Produced in partnership with Prudential as part of TaxAction 2016.

About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.