In the past, inheritance tax would have been regarded by many only as something for the super-wealthy to have to think about.
But the amount the government has collected in inheritance tax has doubled in the last decade, as more and more people are becoming liable to pay the charge.
This increase is set to continue, with forecasts suggesting annual inheritance tax receipts could reach £7.6 billion in the next five years.
These latest figures are likely to further the argument that the inheritance tax threshold isn’t keeping pace with wider changes in the economic environment and people’s personal finances.
The inheritance tax threshold currently stands at £325,000, and this tax doesn’t have to be paid if:
- You leave everything above the £325,000 to a spouse, civil partner or good cause
- The value of your estate doesn’t exceed the threshold
The standard inheritance tax rate is 40%, and this is charged on anything in your estate that’s above the threshold.
However, house prices have risen dramatically in recent years, which is taking the total value of many people’s assets well above £325,000.
In fact, the latest figures from Nationwide show that the average price of a home in the UK now stands at £260,230, following a record increase of £29,162 over the last year.
This was the biggest cash increase in property prices that Nationwide has observed since it began collecting comparable data more than 30 years ago.
The data also suggests that annual house price inflation is accelerating, rising from 11.2 per cent in the year to January to 12.6 per cent in the year to the end of February.
So is the inheritance tax threshold now too low, and should it be keeping pace with house price growth?
The government plans to keep it at its current level until April 2026, so it will be interesting to see if Chancellor of the Exchequer Rishi Sunak addresses this issue in any way in his upcoming Budget on March 23rd.
The increase in house prices reflects how demand for property is far exceeding supply, and how the type of housing that many people are choosing to purchase has changed as a result of the pandemic.
It’s therefore possible that a push to build more homes could help to solve the issue of more people being pushed into paying inheritance tax, but this would be a long-term solution, with the effects not being felt for several years at least.
In the meantime, there will be a greater need than ever for people to get financial advice about managing their money and taking steps to avoid or reduce their inheritance tax liability.