Frozen inheritance tax thresholds are costing households £62k

The long-standing freeze on the principle inheritance tax (IHT) threshold since 2009 is pushing extra estates into the tax internet, costing bereaved households almost £62,000 on common, new analysis has discovered.

The analysis carried out by interactive investor discovered the IHT legal responsibility has risen from a median of £106,000 to £157,000 for estates with a property based mostly in London and the South East.

This is basically attributable to rocketing house prices, which have been most vital in these areas over the 14-year interval because the threshold was final raised.

Meanwhile, progress in investments and financial savings, which had been among the many key belongings factored within the agency’s calculations for IHT legal responsibility over the 14-year interval, signifies that even “modest” estates might now be topic to IHT.

As per interactive investor’s analysis, the worth of the three belongings mixed (home costs, financial savings and investments) elevated to a median of £479,229 by the tip of March 2023, which sees IHT legal responsibility totalling £61,692.

READ MORE: Inheritance tax warning as families risk being hit with ‘unexpected bill’

These calculations are based mostly on progress within the worth of the common property as recorded by the Office for National Statistics, which has proven a rise of 86 % from from £154,452 to £285,009.

The FTSE All Share index returned slightly below 245 % from March 2009 to the tip of March 2023, turning £50,000 into £172,400, whereas progress in money financial savings, as measured by the one-month LIBOR fee (simply over 9 %), turned £20,000 into £21,820.

When the worth of all three belongings is mixed, the property would have been price £224,452 again in March 2009 – which might have fallen throughout the IHT nil fee band of £325,000. Now, the mixed worth exceeds it by £61,692.

Myron Jobson, senior private finance analyst at interactive investor, commented: “Inheritance tax has quickly shifted away from being a tax on the wealthy, as originally intended, to one paid by more modest estates thanks to runaway house prices and solid investment returns over the long term.

“IHT thresholds have remained unchanged since 2009. If uprated with inflation, the IHT nil rate band of £325,000 would have risen to just under £484,000. In other words, the deep freeze in the IHT thresholds has cost families £159,000 since 2009.”

Mr Jobson added: “Residential property makes up the largest share of most estates and average house prices have risen by 85 percent between 2009 and the end of February 2023. Adding growth on investments and cash savings to the mix pushes many beyond the tax-free threshold.”

Describing IHT as a “money spinner” for the Treasury, Mr Jobson mentioned the tax generated £600million for the Government in April 2023 alone.

While nobody likes to consider their very own mortality, Mr Jobson mentioned it will be significant that folks organise their funds prematurely to cut back any potential liabilities and cross on extra to their family members.

Alice Guy, head of pensions and financial savings at interactive investor, weighed in: “It’s important to get advice and make a will to minimise your IHT bill because it’s possible to lose out on valuable tax reliefs.

“Everyone gets an IHT tax-free nil rate band of £325,000, and additionally a residence nil rate band of £175,000 if they own property and pass it to their children or grandchildren.”

Ms Guy mentioned married {couples} may switch any unused nil fee band, successfully “doubling” their exemption.

She added: “This means it’s possible for married homeowners to pass on up to £1million free of inheritance tax.”

For those that have a pension pot and a shares and shares ISA, folks might additionally save inheritance tax by utilizing their ISA first and leaving their pension invested.

Ms Guy mentioned: “Pensions are free from IHT and also aren’t classed as an asset if the council assesses your wealth for care home fees, although they are counted as part of your income.

“Getting married can also be a good way to save tax as spouses can pass assets to each other free from IHT, whereas unmarried partners could end up with a tax bill.”

Making use of annual exemptions will also be a good way to cross on wealth and keep away from an enormous tax headache.

Ms Guy mentioned: “You’re allowed to give up to £3,000 each year in total and you can also give gifts from your surplus income. You’ll need to keep records to prove the money came from income and was surplus to your needs.”