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Does your home breach the inheritance tax limit?

Does your home breach the inheritance tax limit?

Category: Money

Updated: 07/09/2016
First Published: 07/09/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

At one time, inheritance tax (IHT) was something only the wealthy needed to think about, but unfortunately, times are changing. Thanks to rising house prices, more and more people are being trapped in an IHT nightmare, with research from Saga Investment Services finding that the number of properties breaching the IHT threshold is set to hit a record high this year.

The figures show that 26% of properties sold in England and Wales in the first seven months of the year were priced above the £325,000 IHT nil-rate band, up from 24% for the whole of 2015. This means that one in four properties sold could now be at the mercy of extras tax payments, and unsurprisingly, the proportion is even greater in some locations. In London, 72% of properties sold so far this year exceeded £325,000 – up from 65% in 2015 – while in central London the figure rises to 82% (up from 76%).

It isn't only the initial threshold that people may be concerned about, either. There's also been a small rise in the proportion of properties sold for more than £650,000, the maximum that can be passed on by someone who's inherited any unused IHT allowance from their spouse or civil partner: the figures show that 5.8% of property sales exceeded £650,000 during the first seven months of 2016, up from 5.4% in 2015, with the figures once again rising (to 33% from 30%) in central London.

Changes afoot

Happily, the Government is introducing a new IHT allowance for those passing on their main home, which may help matters in the years ahead. The rules mean that, from next year, an individual will be able to pass on £425,000 to their direct descendants, as long as this includes their main residence. This also means that a married couple or civil partnership can pass on as much as £850,000.

The allowance will increase thereafter, too: it'll rise by £25,000 each year until 2020, when a potential £1m can be passed on. But, while this sounds good, it won't solve everything, particularly if house prices continue to rise at their current pace.

Gareth Shaw, head of consumer affairs at Saga Investment Services, commented on the findings: "The latest figures suggest that 2016 will be a record year for property sales exceeding the IHT nil-rate band. And with more people dragged into the IHT net simply because their property has risen in value, the tax is no longer just an issue for the wealthy.

"The main residence allowance will give this group of people in a property hotspot some welcome relief, but the rule will introduce more complexity to the already-confusing UK tax landscape. For anyone who believes their estate may be subject to IHT, early action with a professional financial planner will be a valuable investment."

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