Housing boom widens IHT net

This article is part of
IHT Research Report - November 2013

More than 50 per cent of advisers argue that a client’s main residential property should not be included in an estate for inheritance tax (IHT) purposes, exclusive Financial Times Publishing research reveals.

The findings from a survey from Financial Times Publishing into protection and inheritance tax planning shows that the majority of respondents (50.5 per cent) are against a primary property being used to calculate IHT liabilities.

This is supported by the fact 54.6 per cent of advisers think the main reason for more people being caught in the IHT net is through the rise in property prices.

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Figures from the Office of National Statistics shows the average mix-adjusted house price - which takes into account defining characteristics such as location, type of property, floor size, number of bathrooms and number of bedrooms - in the UK stood at approximately £230,000 in 2012, compared with £136,000 a decade earlier.

Although the one year price change for the average mix-adjusted UK house price fell by more than 7 per cent in 2009, in the wake of the financial crisis, in 2012 the prices started to grow again with a 1.2 per cent year-on-year increase.

Ian Bond, partner at law firm Higgs & Sons, notes: “At the peak of the UK housing market in 2007/08, 6 per cent of all estates at death were liable for IHT with total receipts from the tax being £3.8bn.

“Subsequently receipts from this tax dropped quite sharply, with the onset of the recession and the associated slump in house prices. In 2009/10, the worst year for average house prices, the tax raised £2.3bn and was claimed on fewer than 4 per cent of all estates.”

He adds, however: “Figures from the ONS show the IHT take in the tax year 2012/2013 was £3.1bn, up from £2.9bn the previous year and the third increase in a row.”

The latest house price index from the ONS for September 2013 highlights that growth is driven primarily by properties in London, the south east and Yorkshire and the Humber, however the average prices paid by first time buyers increased 5.3 per cent compared with a year earlier.

Mark Williams, business line manager for IHT at Octopus Investments, adds: “The nil-rate band for IHT was fixed at the current level of £325,000 back in April 2009, with estates worth more than this subject to 40 per cent tax on death. Since then, the average house price in the UK has risen by 30.3 per cent, leading to a significant increase in the value of people’s estates. This has in turn resulted in a growth in IHT receipts for HMRC in recent years.

“What’s more, the government has said that the nil rate band is frozen until 2018 at the earliest. This means that if house prices continue to rise as expected, many more families will be drawn into the IHT net, creating a huge increase in tax receipts for HMRC and making effective IHT planning a much more mainstream financial planning requirement.”

With the IHT threshold remaining static for the foreseeable future but property prices on the rise across the UK – the average mix-adjusted house price in the UK has increased to £245,000 in September 2013 a rise of £15,000 since the start of the year – this is clearly the tipping point for people falling into the IHT net.