Huge IHT Bills Creeping Up On Unwary Homeowners

Massive inheritance tax bills are creeping up on families despite Prime Minister David Cameron’s pledge to push up the nil rate band to £1 million, claims a financial advice firm.

Although Cameron has hinted the cap will be set higher, the nil rate band is likely to stick at £325,000 until at least 2019 and will only rise if the Tories win the next general election in May 2015.

That’s because the Chancellor froze any changes in inheritance tax until after the election.

The problem families face is meanwhile property prices have increased by almost a third during the past five years, with the average price of a home in London and many parts of the south east coming in at £458,000 – already £133,000 above the threshold without including any other assets in an estate.

That £133,000 represents an inheritance tax payment of £53,200.

Tax rising with house prices

As a result, the inheritance tax take is gradually rising in line with house prices.

Taxpayers had to hand over £3.1 billion in the 2012-13 tax year – up 8% on the previous year, according to HM Revenue & Customs (HMRC).

Inheritance tax is paid at a rate of 40% on the value of any estate worth more than £325,000 for a single person. Different rules apply to married couples and civil partners who can combine their nil rate bands.

“No one really paid any attention to freezing the nil-rate band five years ago because average home prices than were much less than they are now,” said a spokesman for financial advice firm Towry.

The firm reckons official figures show around 17,000 estates paid inheritance tax in the 2010-11 tax year, but the net is expanding to capture around 5,000 more families a year.

Avoiding inheritance tax

Many experts claim inheritance tax is a voluntary payment because tax and financial advisers have many ways to mitigate the amount due for payment, including:

  • Taking out life insurance that covers any inheritance tax due – with the premium often paid by the likely beneficiaries
  • Setting up trusts for the benefit of loved ones and children
  • Giving cash to charity – if 10% of an estate is left to a charity, inheritance tax is cut from 40% to 36% on the balance of the estate

“Don’t forget just spending the money is one way to reduce the size of an estate,” said a Towry spokesman. “Downsizing a home and gifting the cash is another favourite way, as the amount of inheritance tax on the gift falls to zero if someone lives seven years after giving the money away.”

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