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Hands up who’d like to pay this tax?

Updated 03 December 2020

3min read

Nick Green
Financial Journalist

Inheritance Tax has been described as a ‘voluntary’ tax, and with careful planning it’s possible to reduce or even eliminate the amount your beneficiaries have to pay. But even in the wake of government reforms, don’t assume it’ll no longer affect you, says financial advisory firm, Armstrong Watson.

shutterstock_85447960The newly elected Conservative government has promised to make changes to Inheritance Tax (IHT) to protect family homes. This pledge alone shows how much IHT has risen in political and public consciousness, particularly now that so many people are finding themselves cash-poor but asset-rich, primarily due to soaring property prices. House price inflation means that based on the value of their residential property alone, many more people are now crossing the current IHT threshold.

Have you been pushed up the scale?

To illustrate the point, data published by the Land Registry in April this year puts the average house price in England at £178,007. If you’re in a detached property this average rises to £281,950 – moving closer to the existing IHT band.

Geography is a factor too: in the North East the average property is worth £97,444, while in the North West it’s £111,149. By contrast, in the South West the average value is £185,162 and in the South East it soars to £243,512. Unsurprisingly, in London it’s an eye-watering £462,799 – well above the current IHT threshold, so it’s no surprise that for some the proposed changes can’t come soon enough.

The dream of IHT-free family homes

The Tories have proposed to create an additional tax free band for main residences worth £175,000 per person (so it doubles up to £350,000 for married couples and those in a civil partnership). This new band, which applies to the main residence only, is added to the existing IHT nil-rate band of £325,000 per person, which has the effect of bringing the threshold up to £1 million for a couple.

It’s been suggested that the government may fund this by further restricting the tax relief on pension contributions for those with earnings in excess of £150,000 and by reducing the current £40,000 annual allowance. Given the introduction of greater pension flexibility and the public’s increased awareness of the need to save for retirement these proposals could appear counterproductive, especially with ever increasing longevity, so for many people it’s a question of prioritising.

But IHT hasn’t gone away

If average house prices are anything to go by, the introduction of a property related nil-rate band will probably benefit those in the South East most of all. However, you need to remember that IHT isn’t only based on the value of your main residence. The tax is payable at 40 per cent on anything in excess of the nil-rate band, and that includes all your assets: your home, any other properties (which won’t qualify for the new additional band), valuables, home contents, savings, cars and investments. So you probably need to ask this question sooner rather than later: ‘Who do I want to inherit my estate when I die?’

It’s said that nothing is certain except death and taxes and IHT happens to combine them both. Very few people would want to pay a tax if they didn’t have to, so it’s worth remembering that description of IHT as a ‘voluntary’ tax. It’s perfectly possible to avoid IHT through wholly legitimate means and to pass on wealth and possessions to loved ones, which is why more and more people are seeking advice in this area. The new pension freedoms can also make a big difference here, as the taxation of death benefits has changed radically.

Don’t leave it too late

If you think IHT could be a potential problem for your family, the time to seek professional advice is now – before it becomes a pressing issue. It could save your beneficiaries thousands of pounds in the long run, as well as a great deal of stress and hassle at a time when they least want to think about it. If you’d rather not volunteer to pay this particular tax, talk to a financial adviser about mitigating the problem.


About the author

Armstrong Watson Financial Planning Ltd is the independent financial advisory division of Armstrong Watson, a leading independent accountancy firm with 15 offices in the North of England and South Scotland.

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.