Three times as many South East homes could be burdened by inheritance tax freeze

A house bought in the South East in 2022 is three times more likely to result in families being hit by inheritance tax than in 2009 when the levy was first frozen at £325,000, research by law firm Mayo Wynne Baxter has revealed.

Analysis of the Land Registry’s price paid data shows that in 2009, 19% of all property purchases (22,342 out of 120,385) in the South East cost £325,000 or more. However, in 2022, this more than trebled to 61% (85,773 out of 141,652).

With 80% of people saying they have not thought about making lifetime gifts to reduce their inheritance tax liabilities and more than one in five people (21%) saying they do not ever expect to consider estate planning, according to a survey of 1,000 people by Mayo Wynne Baxter, more families could find themselves being burdened by inheritance tax.

Fiona Dodd, private client partner at Mayo Wynne Baxter, said: “When modern inheritance tax, known as estate duty, was introduced in 1894, it was intended to affect only the extremely wealthy.

“However, the tax-free allowance has been frozen at its current rate for more than a decade, where it will remain until at least 2026 despite increasing house prices and inflation – bringing more families into the net.

“As our survey shows, many people do not believe they will ever have to consider estate planning. However, rising house prices are swelling estate values and more properties are edging towards the £325,000 allowance – before possessions and money are even taken into account.

“The standard inheritance tax rate is 40%, which can eat into what is left behind, leaving families facing an unexpected and potentially large bill.”

Inheritance tax is paid if a person’s estate – including their property, money and possessions – is worth more than £325,000 when they die.

The rate of inheritance tax is 40% on anything above the threshold. In the latest financial year (2022-23), inheritance taxes raised a record £7.1 billion for the Treasury – £1 billion more than the previous year (2021-22).

If the main home is being left to children or other direct descendants such as grandchildren, people can take advantage of the residence nil-rate band, introduced in 2017, which will increase the threshold by £175,000 – taking the tax-free allowance to £500,000.

However, the number of properties that were purchased for £500,000 or more in the South East in 2022 quadrupled when compared with 2009 (28% versus 7%), according to the Land Registry’s price paid data.

Jessica Partridge, private client partner at Mayo Wynne Baxter, said: “Many families that do not consider themselves to be wealthy could find themselves facing an unexpected tax bill because of the property they inherit.

“There are steps people can put in place to mitigate their inheritance tax liabilities and there are lots of options available to ensure as much wealth as possible passes to your beneficiaries rather than HMRC. Tax is such a complex area and the key to success is taking early specialist advice.

“There are some basics everyone should look at, like making a will to ensure an estate is not shared according to pre-determined rules. Pensions can be a valuable tool when passing down wealth as the contents of a pension are not generally subject to inheritance tax.

“Any donations to charity given as part of a will are also not subject to inheritance tax. Donating at least 10% of an estate triggers a discount on the rate paid too, reducing it to 36%.

“There are other solutions that might be available to people depending on their circumstances. Those wishing to make gifts while retaining control might consider using a trust or a family investment company, for example.

“Business owners may find that a substantial element of their wealth could be exempt from inheritance tax, but the reliefs are subject to very strict conditions, and it is easy to trip over those conditions and fall into an unexpected tax liability.

“With a huge menu of options, anyone with a potential inheritance tax liability should take specialist tax and legal advice to ensure they are making the best of their situation.”

Mayo Wynne Baxter’s research also found that despite almost half of people (46%) expecting to receive inheritance when a loved one dies, only a third (34%) have discussed the subject with their parents.

With one in five people (21%) saying they are relying on an inheritance to supplement themselves financially in the future, rising estate values could see an influx of people contesting their loved ones’ wills, leading to costly and upsetting inheritance disputes.

Caroline Flint, contentious probate partner at Mayo Wynne Baxter, said: “Estates increasing in value and the static inheritance tax threshold means there is more for families to fight over.

“Furthermore, it provides an incentive to leave a greater proportion of the estate to charity to benefit from a reduced rate of inheritance tax or a spouse or civil partner as those gifts will not attract inheritance tax. Despite being a tax-efficient thing to do, it can create more disputes.

“Trying to balance the needs of competing members of a blended family is often very difficult, and the fractious nature of some of those relationships can also lead to disputes.

“With growing inheritance tax bills, it is possible that people may be tempted to take part in aggressive tax schemes, but we generally advise against these as HMRC have some general tools available to them that make ‘tax schemes’ generally ineffective.

“In order to avoid problems down the line and legal disputes, the most important thing is to work with a reputable specialist tax adviser who can help you find the best way forward.

“With all this in mind, one cannot underestimate the benefit of families having open and honest discussions to avoid any confusion and financial misunderstanding when they eventually die.

“All too often, the cases we deal with come from a lack of communication and a will containing a surprise that leaves people without money they were depending on.”

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