1 in 40 homes is now worth more than £1 million and it could affect Inheritance Tax liability

06 April 2023

Demand for larger properties and rising prices mean more homes than ever are worth £1 million or more. For some, it could mean their estate is unexpectedly liable for Inheritance Tax (IHT). 

According to Savills, 1 in every 40 homes is now valued at £1 million or more across Great Britain. Demand meant that around 40,000 properties crossed the £1 million threshold in 2022. 

Unsurprisingly, London has the greatest proportion of £1 million homes. In fact, 1 in every 10.6 homes in the capital is worth at least £1 million. However, for the first time in at least 15 years, more than half of the homes that surpassed the £1 million mark are outside of London. 

As you can’t easily access property wealth, it may be something you’ve overlooked when you consider how your wealth will change.

Yet, soaring property prices could mean you need to think about IHT. There are often steps you can take to reduce a potential IHT bill, but you will need to be proactive. 

The threshold for paying Inheritance Tax is £325,000

IHT is a tax on your estate when you pass away. The standard IHT rate is 40%, so it could leave your loved ones with a significant bill. 

If the entire value of all your assets exceeds the nil-rate band, which is £325,000 for the 2023/24 tax year, you may be liable for IHT.

You may be able to use the residence nil-rate band, which is £175,000 in 2023/24, if you leave your main home to children or grandchildren.

You can also pass on unused allowances to your spouse or civil partner. In effect, you could leave up to £1 million without paying IHT as a couple. 

While the allowances may seem high, it could be easier than you think to exceed them, especially when you consider how the value of your assets could rise during your lifetime. 

According to Halifax, the average house price in the UK in February was more than £282,000. So, your home alone could use up a substantial proportion of your nil-rate band. 

5 practical steps you can take to reduce a potential Inheritance Tax bill 

1. Write a will 

Whether IHT is a concern or not, you should write a will – it is the only way to ensure your assets are distributed according to your wishes. 

From an IHT perspective, writing a will can help you make use of allowances. For example, by stating you’d like your child to inherit your home, you can use the residence nil-rate band to increase how much you can tax-efficiently pass on. 

2. Gift some assets now

Gifting assets now can reduce the value of your estate to bring it below the IHT threshold or reduce the bill. There are some things that you need to be mindful of with this option.

First, it could affect the inheritance your loved ones receive, so it’s worth speaking to them about how you want to pass on wealth.

Second, you should consider if gifting some of your assets now could affect your long-term financial security. Will you still have enough income or savings to maintain your lifestyle? Would you be able to overcome a financial shock?

Finally, not all gifts are immediately outside of your estate for IHT purposes. Some gifts may be considered when calculating IHT tax liability if you pass away within seven years of gifting them. So, it’s important to understand if this would be the case. Please contact us if you want to gift assets to reduce IHT to discuss your options. 

3. Take out life insurance

Life insurance won’t reduce an IHT bill, but it could provide your loved ones with a way to pay it.

A life insurance policy could pay out a lump sum when you pass away, assuming you pay the premiums. You can choose the level of cover to suit your needs. Your loved ones can then use this lump sum to pay the bill, so they won’t need to sell or deplete other assets. 

If you want to take out life insurance to pay an IHT bill, it should be written in trust. Otherwise, it could count as part of your estate and increase the IHT bill. 

4. Leave some of your assets to charity 

Assets that you leave to charity aren’t considered in your estate for IHT purposes. So, you could have a positive impact on a good cause while reducing the amount of IHT due.

You could leave assets to charity to bring the total value of your estate below the IHT thresholds. Or, if you leave at least 10% of your estate to charity, the IHT rate you pay falls from 40% to 36%. In some cases, this could reduce your overall bill. 

5. Arrange a meeting with us

There are often other steps you can take to reduce an IHT bill depending on your circumstances and goals. We can help you create a plan that’s tailored to you. Please get in touch to arrange a meeting. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax planning, will writing, or estate planning.

Categories: Inheritance, Tax

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