Could your home be exposing you to inheritance tax?

Valerie Cronshaw

Valerie Cronshaw

Chartered Financial Planner

15 May 2024

As the saying goes, there are two things certain in life, “death and taxes” and there is one that happens in conjunction with the other.  

Inheritance tax is a tax on your assets upon death and of all the taxes, and there are many, inheritance tax is probably the most emotive. Yet it is estimated that only around 4% of estates pay inheritance tax and one of the reasons for this is that you can plan for it. However, HMRC inheritance tax taken between April and August 2023 was up 10% and this trend is rising.   

If you can plan for it, why is this happening? Well potentially it may be your home and stagnating allowances. 

Understanding inheritance tax 

Inheritance tax is due on the estate of a deceased person if it is above a certain threshold. Every person in the UK can pass on £325,000 without inheritance tax falling due, known as the Nil Rate Band.  

In 2017, the Government also introduced the Residence Nil Rate Band. If you own a main residence, you can potentially pass on an additional £175,000 per person or the value of your property, whichever is lower, to direct descendants without tax falling due. 

It has been confirmed, these allowances will remain the same until at least 5th April 2028, which equates to a stealth tax rise for many. In real terms, the amount you can pass onto your family free from inheritance tax has reduced year on year and will likely continue to.  

This is because the value of your assets and your properties is unlikely to remain constant. Growing assets and stagnant allowances will result in more being captured by inheritance tax. 

Over the last twenty years the UK has seen a boom in additional property ownership whether it is buy to lets or holiday homes, and over time you would expect the value of your property to rise.  

The average 12-month percentage increase in properties across the UK from January 2006 to January 2023 has been 3.74%.1 This means the average house price in the UK as of January 2024 was £282,000, in Scotland as of February 2024 it was £228,000 yet in Edinburgh, one of Scotland’s most expensive cities, it was £325,000 as of February 2024 with a detached property costing an average of £722,0002.  

Property ownership can create a headache for those looking to mitigate inheritance tax. Gifting your main residence can be problematic if you still want to live there and control the asset. Properties out with your main residence may be easier to gift but you could be reliant on rental income from let properties or still want to use your holiday home without gifting it. Gifting properties out with your main residence could also create a capital gain and could incur legal fees or stamp duty etc. Why swap one tax for another, as potentially you could end up taxed twice.   

With the average cost of property increasing, it is resulting in more people breaching the Nil Rate and Residence Nil Rate Bands and more inheritance tax falling due.  

Ways to mitigate your inheritance tax liability 

  • There are many ways to reduce your potential exposure to inheritance tax but no one solution to fit all circumstances.  
  • Use spousal exemptions – There is no inheritance tax due when assets pass from one spouse or civil partner to another.  
  • Using gift allowances – each year you can gift £3,000 per person as your annual gift allowance and the money will move out of your estate immediately. There are also some other allowances; £250 small gift allowance, regular gifts out of surplus income and gifts for weddings.  
  • Making Lifetime Gifts – Making larger gifts to family while you are still alive could reduce your exposure to Inheritance Tax. Gifts made more than seven years before death are excluded from the value of your estate and gifts made more than three years ago may be subject to Taper Relief, potentially reducing your inheritance tax liability.  
  • Life Insurance – If most of your assets are tied up in property, it could make it more difficult to make gifts to reduce your inheritance tax liability. This is one instance where Life Insurance could help but it does not get rid of your liability, instead it gives your executors a lump sum to allow them to pay any liability that falls due.  

Owning property in the UK could be causing you to have an inheritance tax liability, but with careful planning this liability can be managed to reduce the amount of tax that will fall due on your death.  

If you would like to discuss how this affects you, please contact myself or one of our planners who would be delighted to help.  

Disclaimer: Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority. 

This communication should not be read as financial advice. While all possible care is taken in the completion of this  article, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.  

This article is based on our understanding of tax legislation as at 09/05/2024. The benefit of any reliefs or allowances will depend upon your own situation. 

All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change and are dependent on your individual circumstances. 

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