20 August 2021

Are rising house prices increasing your Inheritance Tax bill?

With house prices rising over 10% in the last year and many people have increased their savings, is now the time to consider or reconsider your Inheritance Tax planning? Find out how to reduce your IHT bill.

Over the past year UK house prices have risen by more than 10%, this combined with numerous lockdowns means many have also increased their savings. Whilst an increase in net worth is welcome, the nil rate band for Inheritance Tax (IHT) purposes still sits at £325,000 and the March 2021 budget states that it will remain frozen at this amount until April 2026.


What is the nil rate band?

The nil rate band is the amount of your estate that is protected from IHT, with your estate generally being your worldwide assets. Any value above the nil rate band is often taxed at 40% on death.


What is the residential nil rate band?

There is an additional residential nil rate band of £175,000 where your main home is passed down to your children or grandchildren and your estate is worth less than £2,000,000. Therefore, if you are a married couple and are both entitled to the residential nil rate band, then up to £1,000,000 of your estate can be sheltered from IHT.


How do I protect my house from Inheritance Tax?

For many, their home is their biggest asset in their estate. Taking your main residence out of your estate, whilst possible, is complex. It is often easier to focus on inheritance tax planning for your other assets in the first instance, which will in turn mean that you will have more nil rate band available to use against your home. 


How can I reduce Inheritance Tax?

For those with larger estates, it is possible to significantly reduce your Inheritance Tax exposure with careful planning. But early planning is key.

Here are our top 5 tips when considering IHT planning 


1. Business Property Relief (BPR)

Business owners are eligible for Business Property Relief on the value of their trading business where this has been owned for at least 2 years. Whilst the value of the business is included within your estate, BPR can cover up to 100% of the value and therefore the business could be passed on without any IHT charge.    


2. Pensions

Saving into a pension offers several tax advantages including tax relief when contributions are made into the pension scheme. They are also advantageous from an IHT perspective as in most cases, upon death the pension scheme is not considered to make up part of your estate and therefore will not be subject to IHT. Depending on the age of the individual and the status of the pension on death, the pension could potentially be transferred to the nominated person completely free of any tax.


3. Gifts

There are a number of exemptions for gifts of cash including a £3,000 annual allowance, small gifts of up to £250 per person and concessions for regular gifting. These exemptions allow for the gift to fall immediately outside of your estate.

Larger gifts are treated as Potentially Exempt Transfers (PET) which means that if the period between the gift and death is within 7 years, there may be an IHT charge. The amount of the charge depends on the size of the gift and the length of time between the gift and death, with the longer the gap the lower the amount of tax due. Once the gift is made more than 7 years ago, this will fall outside of your estate.


4. Trusts

Trusts are a flexible way to gift cash or assets, as they can allow the individual making the gift to retain some control over the assets. Depending on the type of trust, the trustees can have discretion over how the income and capital is accumulated and distributed to the beneficiaries. Advice should be taken in relation to the setup of the trust as although it is possible to set up a trust without incurring a tax charge, when the funds are gifted to the trust, they are usually considered to be chargeable lifetime transfers. 


5. AIM portfolio/EIS Shares

Enterprise Investment Scheme shares and shares in AIM listed companies can be eligible for Business Property Relief. This means that upon death, if the qualifying investment is held for two years, the value of the assets will qualify for up to 100% relief and will therefore not be liable to inheritance tax. Investment advice should be taken in relation to these shareholdings.


Whilst it may not be possible to completely mitigate your Inheritance Tax liability, there are ways that you can significantly cut your estate’s tax bill and increase the amount passed on to your family and heirs. However, you should seek professional advice before taking action.

If you would like to discuss any of the above in further detail, please get in touch with us and we can talk you through your options.