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House price inflation has been in the news a lot over the past two years and with good reason. As at February 2022, The Nationwide House Price index showed an annual UK house price growth of 12.6%, up from 11.2% in January and 10.4% in December.

Winners and losers

Prices for a typical home are now 20% higher than in February 2020 – great news for existing homeowners and other residential property owners but a real challenge for those just starting out, needing larger deposits to get onto the housing ladder, especially with escalating living costs to budget for too.

It’s also been good news for HMRC, who’ve had a boost in Inheritance Tax (IHT) receipts, in part driven by higher property values. For the period between April 2021 and January 2022, IHT receipts totalled £5 billion, up £700 million on the same period the year before.

In January 2022 alone, HMRC took in an additional £400million in Inheritance Tax.

Allowances are not keeping pace

From April 2017 an additional inheritance tax allowance was introduced in recognition of the fact that more estates were falling into the scope of inheritance tax due primarily to increasing property values.

The Residence Nil Rate Band (RNRB) was phased in over a number of years and now stands at £175,000 per person on top of the standard “nil rate band” of £325,000 which means that a married or civil partner couple can potentially leave £1 million of assets to their heirs without incurring Inheritance Tax.

As ever there are a few catches!

  • If your overall estate exceeds £2m you do not qualify for the extra allowance and so a married couple would then only have a maximum allowance of just £650,000 between them.
  • Pension funds don’t count towards the limit but strangely business assets do even though they may be exempt from inheritance tax.
  • The main residence must also pass to direct descendants so it is essential that any Will planning reflects this either within the Will or if Trusts are involved, that Trustees are given guidance to consider appointing the main residence out to direct descendants within two years of death in order to maximise the relief.

Implications for planning

As highlighted in our article on pension scheme death benefits – pensions, estate planning and in fact business succession planning all go hand in hand as a decision in one area can have a knock on effect on another so it is important to look at the bigger picture.

Although most of our clients’ estates far exceed the £2m threshold, their family members, parents, or grandparents might find themselves affected by it, so it’s important to look over a number of generations to ensure wealth is protected from tax, and gifting plans should ideally be discussed and planned together.

Chartered Financial Planner at FPC, Helen Thomas comments:

“Although the additional allowance is valuable it has been frozen at the same rate as when it was introduced in 2017 so with house prices escalating at current rates, it’s likely that more and more estates will pass the £1million threshold and assets will become chargeable to Inheritance Tax.

This brings into focus, the importance of effective Inheritance Tax planning including a regular review of gifting plans to make use of available allowances from the relatively modest annual £3,000 gifts allowance to the ability to gift up to £325,000 into Trusts; gift tax exempt business assets or gift funds to establish a family investment company that can benefit generations to come.

No one wants to pay more tax than they need to and we can help with bespoke solutions to suit all circumstances.”

If you’re interested in talking to us about how you can reduce your inheritance tax burden with the help of our AIMS (interactive lifetime cashflow) modelling, give us a call on 01704 571777.  The team is on hand to answer your queries and help devise a planning strategy which is best for you.

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