Property costs are dragging extra households into inheritance tax: Housing wealth now makes up practically HALF of tax-paying estates in some areas
More households are being dragged into paying inheritance tax because of property price rises, new data reveals.
Housing wealth now accounts for 47 per cent of the total wealth, on average, in estates which pay inheritance tax (IHT) in London, and there are four other regions where it accounts for more than a third.
This is according to a Freedom of Information request obtained by retirement specialists Just Group, which highlights how paying death duties is no longer solely the preserve of the cash-rich.
Inheritance tax-paying estates in the capital have £862,222 of property wealth on average, as house prices have soared over the previous decades.
Just 37 per cent of the value of these estates were made up with cash and investments, the lowest across the country.
Cash and securities matches or trumps property in all other regions, according to the latest available data from HM Revenue & Customs which is from the 2022-23 tax year, but the gap is narrowing.
High house prices in the capital mean property wealth makes up half of an estate
Who pays inheritance tax?
IHT – often called Britain’s most hated tax – is levied at 40 per cent on estates over a £325,000 threshold.
Those who leave their property to direct descendants have an extra £175,000 tax-free allowance.
Spouses can pool their allowances, which means a couple could leave a family home worth £1million free of IHT.
Families can also give away money and valuables during their lifetime to slim down their estate, which means a lower death duty bill for grieving loved ones.
> Ten ways to avoid inheritance tax legally
| Region | Total No. of Estates | Av. Estate Value | Av. Value of Property | Proportion of Average Estate | Av. value of securities & cash | Proportion of Average Estate |
|---|---|---|---|---|---|---|
| London | 5100 | £1,601,961 | £862,222 | 47% | £720,032 | 37% |
| South East | 6650 | £1,309,774 | £661,896 | 42% | £640,750 | 43% |
| East of England | 3430 | £1,221,574 | £589,226 | 42% | £585,525 | 42% |
| South West | 3640 | £1,250,000 | £547,855 | 36% | £647,356 | 46% |
| East Midlands | 1470 | £1,088,435 | £422,581 | 33% | £609,338 | 50% |
| North West | 2040 | £1,073,529 | £404,000 | 32% | £615,884 | 52% |
| Wales | 1030 | £1,029,126 | £384,703 | 32% | £472,539 | 42% |
| West Midlands | 1840 | £1,173,913 | £440,268 | 30% | £665,402 | 51% |
| Yorkshire & Humber | 1460 | £1,136,986 | £402,439 | 30% | £642,114 | 51% |
| North East | 555 | £1,000,000 | £324,201 | 26% | £628,094 | 58% |
| Northern Ireland | 334 | £970,060 | £298,182 | 25% | £678,231 | 57% |
| Scotland | 1680 | £1,220,238 | £363,971 | 24% | £736,140 | 55% |
The donor usually needs to survive for seven years after making the gift for the amount to fall outside of the estate when they die.
Despite this lucrative allowance, thousands of families across the UK are being caught out by the death levy.
Other regions where property wealth makes up a huge chunk of the estate are the south east and the east of England – some 42 per cent each.
While house values are beginning to struggle in the capital and its surrounding area, price tags have soared over the past two decades which means property is a major driver behind a family’s wealth.
However, in other regions where house prices are typically lower, property accounts for a smaller proportion of the estate’s value.
In Scotland, for example, property makes up just 24 per cent of an IHT-paying estate – the lowest across the country. In cash terms, it is £363,971. Meanwhile in Northern Ireland it makes up just 25 per cent and in the north east it is just 26 per cent.
In 2022-23, IHT-paying estates in London had the highest average value across the country at £1,601,961.
The next highest is the south east at £1,309,774 closely followed by the east of England at £1,221,574.
The numbger This amount is likely to have risen since then due to house price increases.
Unspent pensions will also be included in IHT calculations from 2027, adding to the number of families who will have to pay.
At the other end of the scale, it is those liable to pay death duties in Northern Ireland that have the lowest amount in their estates at £970,060.
Families in the north east are also at the bottom end with a £1million estate.
South east has MOST inheritance tax payers
It is the southeast which has the highest number of estates which are liable for death duties – some 6,650.
In London the figure is a high 5,100 while in the south-west there were 3,640 estates in the IHT tax net.
Northern Ireland is again at the bottom of the list with 334 estates while in the north east it is a small 555.
David Cooper, of Just Group, said: ‘It is evident that housing wealth in regions like London, the east and the south east makes up a larger proportion of the estates compared to other regions.
‘The average value of property in London estates paying IHT is nearly double that of most other regions across the UK.
‘With asset prices continuing to grow and the IHT regime seeing a significant tightening in the Autumn Budget 2024, it’s likely more people will be dragged into paying the tax through the value of their property.’
In 2022-23, just under 5 per cent of estates paid death levies but this is set to climb in the coming years as even more families will be dragged into the tax net.
The nil-rate band – which is £325,000 – has been frozen since 2009. This punitive tax freeze has pulled droves of more middle-income families into paying death duties net as their estates and property values soar, a phenomenon known as fiscal drag.
Chancellor Rachel Reeves also extended the freeze to April 2028 which will hit even more modest families with a tax liability.
The exchequer raked in a bumper £5.8billion into its coffers in the first eight months of this tax year, official figures show.
It is set to pull in a record take into its coffers from inheritance tax this tax year as fiscal drag eats away at the inheritance left to loved ones.
And this is only set to soar in the coming years as pensions – which are currently exempt from the duty – will fall into estates from April 2027, a move that has caused reams of savers to upend their financial planning.
Little-known tricks to cut your tax bill
You can gift any amount to family or friends completely free of death duties so long as you survive for seven years after making the gift.
If you want to pass on any cash or material gifts, make them earlier instead of later to start the seven-year clock ticking.
If you die within seven-years of making the gift, it won’t fall outside of your estate completely.
However, it could benefit from taper relief. The closer to the full seven years you survive, the less tax your estate needs to pay.
For a payment made in the last three years before death, the full 40 per cent is levied.
Plan ahead: Gifting money to family seven years before you die usually makes it free of IHT
But any gifts made four to five years ago face a 24 per cent charge, while those made five to six years before your death have a 16 per cent IHT rate.
Those given six to seven years ago are charged at 8 per cent. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 per cent tax bill.
Plus, you can make the most of your gifting allowances to pass on wealth tax-free while you are still alive.
Everyone gets a £3,000 annual gift allowance, which is exempt from their estate.
If you didn’t use it in the previous year, you can carry the allowance forward, but only by one year.
This means that a couple can gift as much as £12,000 in one year completely free of death duties. The seven-year rule does not apply here, so if you die within that period of making these gifts there is still no tax payable.
But you can also give away an unlimited number of small gifts up to £250, so long as you haven’t used another IHT allowance on the same recipient.
Another trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership.
You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made ‘in consideration of’ a marriage or civil partnership so payments must be made just before it takes place and not after.
Growing numbers of families are also considering putting life insurance policies into trust to pay any potential tax bill.
These pay out to your loved ones when you die and if they are placed correctly into trust they are treated as if they are not part of your estate – and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die.
However, this can be a costly planning tool and may come with risks.
For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead.
Arguably the most generous allowance is known as gifts out of normal expenditure, where you can gift an unlimited amount of money.
Beware, there are strict criteria you must meet. The payment must be regular, out of income and must not affect your standard of living – and you must keep good records.
