House prices and inflation cause inheritance tax worries 

By Rachel Newcombe | Thursday 21st July | 4 minute read

One casualty of the increasing rise in house prices and inflation is the families left to pay inheritance tax when a loved one dies. 

House prices and inflation cause inheritance tax worries

Dealing with inheritance tax and probate is never an easy job, but with the current rate of house price and inflation growth, even more families have been pushed over the inheritance tax threshold. It used to be thought that inheritance tax only affected the very wealthy, but sadly it’s a real and costly issue for many people today. 

Currently families are forced to pay tax of up to 40% on the value of any estate over £325,000 – and with the boom in house prices, this is affecting more and more people. The inheritance tax threshold has been at this level since 2011 and in theory is set to stay there until 2026. 

According to recent research by the Wealth Club, the average bill for inheritance tax this year is a whopping £266,444 – up 27% on the cost in 2019-2020. Data from HMRC shows that families paid a massive £500m in inheritance tax in April 2022, which equates to an extra £10m compared to what was paid in the equivalent month in 2021.

The Office for Budget Responsibility predicts that this financial year, 2022-2023, the amount of inheritance tax paid could be up to £6.7 billion. By 2026, the number of estates that are liable for inheritance tax could well double, with predictions forecasting that £7.8 – 8.3 billion in inheritance tax could be paid. 

The rise in the numbers of families being affected by inheritance tax hasn’t gone unnoticed. In fact, prior to the recent shake up in the Conservative Party, many Tory MPs had been calling on the then Chancellor of the Exchequer, Rishi Sunak, to raise the threshold in line with the rise in house prices and cost of living. However as yet, no change in the threshold has been mentioned. 

What is inheritance tax?

Inheritance tax is the tax that needs to be paid on the estate of someone who dies. It includes all property, money and possessions. If there’s a will, it normally comes down to the executor of the will to pay the inheritance tax. In cases where there’s no will, it’s usually the administrator of the estate who sorts out inheritance tax payments. Inheritance tax needs to be paid six months after someone dies. 

The six-month cut-off point may seem like a long time, but in reality, dealing with an estate and probate can often be a long-winded process that doesn’t move that quickly, so the inheritance tax payment deadline can come around sooner than expected. If you’ve not dealt with probate before, there are a number of tasks to do, such as notifying banks, building societies, government organisations such as HMRC and the local council, as well as settling outstanding accounts and adding up all the assets and liabilities. 

It’s only after any inheritance tax owed and debts, such as mortgage fees or the cost of a funeral, are paid off that the executor or administrator can distribute the remains of the estate, in accordance with the deceased’s wishes. 

Inheritance tax is charged on the part of the estate that falls over the tax-free threshold of £325,000. For example, if an estate is valued at a worth of £525,000, inheritance tax will be charged on £200,000 of it. At 40%, it works out as a bill of £80,000 that needs to be paid.

For many families, this is a huge amount of money to pay, especially as the payment usually needs to be made before probate is granted, along with any other taxes that are due. Sometimes it’s possible to make the payments in stages before the property is sold, but it can still be a really stressful time worrying about where the money for the payment is going to come from. 

Reducing inheritance tax worries 

If you’re worried about inheritance tax affecting your family when you die, there are some ways in which you can reduce your inheritance tax liability. For example, you could spend money now to help reduce your overall estate, you could gift money or assets to your children and grandchildren, give to charities, set up trusts in your will or you could insure yourself against inheritance tax liability. 

Leaving your estate to a spouse or civil partner can also help reduce the amount of inheritance tax payable, as can paying into a pension instead of a savings account. 

If it’s too late for a loved one to think of these options and you’re already facing inheritance tax worries, there are still options available for you. For example, a probate loan can enable executors and beneficiaries of estates to borrow up to 70% of the expected inheritance. This can be used to help pay for inheritance tax before you’re able to sell the property or land. The loan isn’t subject to monthly payments and can be available quickly. If you’re stuck in a situation where a large inheritance tax bill needs to be paid before you can proceed further with the process, it can be very helpful and help reduce some of the stress and worry associated with inheritance tax. 

Stephen Clark from Finbri said, “It remains to be seen whether or not the tax threshold will remain at £325,000 until 2026 or not. For the large number of families who are likely to have to face inheritance tax woes in the coming years, it can only be hoped that the current, or future, Chancellor of the Exchequer will revisit the threshold sooner and raise it appropriately in line with the rise in inflation and house prices that have occurred.

“As UK inflation hits a 40-year high, rising house prices breaking records, and frozen inheritance tax allowances, inheritance tax is hitting Britons harder than it ever has before.”

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