Inheritance Tax: one in four properties sold in 2016 'would be liable'

New research shows that IHT changes can’t come soon enough as more and more properties exceed the nil-rate band.

The proportion of properties sold in England and Wales that exceed the £325,000 Inheritance Tax (IHT) ‘nil-rate band’ is on course to reach a record high, according to new research.

When you die, IHT is currently due at 40% of the value of your estate above £325,000, or £650,000 for married couples or those in a civil partnership.

Saga Investment Services found that, so far in 2016, more than one in four properties were purchased at a value that exceeds the Inheritance Tax ‘nil-rate band’.

This compares to 13% of properties in 2009 when the band was first set.

The research highlights how the impending shakeup to IHT rules, which will see a new nil-rate band introduced in April 2017 for those passing on their main home to a direct descendant, is urgently needed.

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Surging property prices

Saga analysed 105 postcode areas in England and Wales and found the biggest area for property price growth pushing people over the threshold for IHT was unsurprisingly London.

In central London, four out of five (82%) properties sold so far this year exceed the threshold, up from 76% in 2015.

Almost two thirds of properties in outer London were sold for more than £325,000 in the first seven months of the year compared to 55% last year.

Combining inner and outer London, nearly three in four (72%) properties were purchased above the IHT nil-rate band, compared to 65% in 2015 and just 34% in 2009.

Source: Saga Investment Services

 Overall, there has been a smaller rise in the number of properties sold for more than £650,000 – the maximum threshold for anyone that inherits any unused IHT allowance from their spouse or civil partner.

Just 5.8% of property sales exceeded £650,000 so far in 2016 compared to 5.4% in 2015, but the figure is more than double the number in 2009 when it was 2.4%.

Again the proportion of properties exceeding the £650,000 allowance is much more prevalent in London.

A third of properties (33%) sold in central London exceeded the combined IHT allowance, up from 30% last year.

One in five properties across 11 postcode areas were sold for more than £650,000. This has risen from just three postcode areas in 2009.

IHT changes

Saga’s findings reveal just how inadequate the IHT rules have become in light of surging property prices.

Thankfully, the Government is planning to introduce a new IHT allowance for people passing on their main home to a direct descendent including children (adopted, foster or stepchildren) or grandchildren, next year.

This means from April 6 2017, an individual will be allowed to pass on £425,000 to their heirs, if this includes their main residence. This means those in a married couple or civil partnership could pass on as much as £850,000.

The new main residence nil-rate band allowance will then rise by £25,000 each year until it reaches £175,000 in 2020 when the allowance will be £500,000 or £1 million for married couples or those in a civil partnership.

From 2021 onwards the allowance will rise with inflation as measured by the Consumer Prices Index (CPI).

If someone downsizes their home, they will still be able to pass on assets to the equivalent value their current home to direct descendants. However, estates exceeding £2m will see the new additional nil-rate band withdrawn, tapered at a rate of £1 for every £2 their estate is above this amount.

For tips on how to reduce what you pay in IHT read: How to cut your Inheritance Tax bill.

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