The UK housing market has witnessed a surge in house price growth over the past year. Figures published by Nationwide show that UK house prices increased by 12.6% between February 2021 and February 2022.
A rise in house prices puts large estates at greater risk of facing expensive inheritance tax (IHT) bills, particularly since the tax-free IHT threshold has been frozen until April 2026.
The situation is exacerbated for estates valued at over £2,000,000. Estates that exceed £2,000,000 in value are unable to benefit from the full residence nil-rate band (RNRB)/family home allowance of £175,000 per spouse. Instead, the RNRB allowance tapers away. For every £2 that this threshold is exceeded by, £1 of the allowance is lost.
The scenario in the table below illustrates how this can lead to increased IHT charges. The taxable part of the estate has risen by £150,000. This is because the property value has increased by £100,000 (10% year-on-year rise), which in turn leads to a £50,000 reduction to the available family home allowance. The taxable estate, now worth £1,150,000, faces the standard IHT charge of 40%, raising the tax bill by £60,000.
Meanwhile, HMRC has unveiled an inheritance tax (IHT) tool that allows people to estimate whether their estate is likely to face a future tax bill, or enables families to calculate whether IHT is payable upon the death of a relation.
If the total estimated value of the estate exceeds the threshold upon which IHT is due (currently set at £325,000, but allowances mean this can be up to £1,000,000), the user is redirected to further information, including tax relief information that may be applicable depending on individual circumstances.
The HMRC tool provides useful guidance, but is not intended to act as a calculator. Estate planning is a complicated area, and seeking expert help is advisable. If you would like to discuss your estate planning options, contact a Lumin expert on 03300 564 446, or get in touch via our contact form.
For further estate planning insights, request our ‘Top tips on IHT/estate planning’ factsheet.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
