Inheritance tax hot spots revealed – which ones? New
Just under nine in ten properties sold in England and Wales last year were below the inheritance tax threshold, exclusive to new research from Which? can reveal, showing how the new tax break has lifted thousands of domains out of the tax trap.
A new Inheritance Tax Benefit (IHT) was introduced in 2017, giving individuals an additional Â£ 100,000 to pass on if their estate included their family home. This year, the allowance – the ‘zero residence rate band’ – increased to Â£ 175,000, allowing an individual to pass a total of Â£ 500,000, and married couples and civil partnerships up to 1 million of pounds sterling.
Government tax revenues show that only 3.9% of estates paid IHT in 2017-18, the first year of the new zero rate bracket, resulting in lower IHT income for the first times in eight years.
But our analysis of property sales and official statistics from the IHT show that some areas of the UK will benefit more than others.
Since the new strip of residence is tied to property, where you live and the average price of property in your area will have a big impact on the likelihood that you end up with a bill owing.
In fact, figures for 2017/18 show that more than half (53%) of inheritance income for England and Wales came from London and the South East alone.
So while the changes mean thousands of people will no longer have to worry about IHT, there are still many living in a tax hot spot.
How do inheritance tax reductions work?
When you die, whatever is left to your spouse or civil partner is passed on tax-free.
When you bequeath something to someone else, everyone has access to a ‘zero rate band’ (NRB) which has been set at Â£ 325,000 since 2009. This can be used when you bequeath any active to whoever you want.
However, in response to rising house prices, the government introduced a second tranche in fiscal year 2017-18 – the zero-rate residency tranche – which gave you an additional allowance of 100,000. Â£ when transferring your primary residence.
Since this was part of former Chancellor George Osborne’s plan to “exempt the family home from inheritance tax,” this only applies to direct descendants, such as children, grandchildren or children. stepchildren.
The zero-rate residency bracket has increased by Â£ 25,000 every year since, until it reached Â£ 175,000 in April 2020. This means that between the two brackets, an individual can now pass on a property from worth up to Â£ 500,000 tax free. .
You can transfer unused IHT allowances to your spouse or civil partner. This means married couples and civil partnerships could pass up to Â£ 1million tax-free.
Find out how to bequeath your wealth to your spouse in our guide for married couples and civil partners.
What impact has the new group had?
Before the introduction of the new residence strip, land register data shows that more than one in four properties in England and Wales were sold above the Â£ 325,000 threshold.
As shown in the graph below, adding the additional Â£ 100,000 allowance in 2017/18 caused the number of homes sold above the combined allowance to drop sharply, to 17%.
Figures from HM Revenue and Customs (HMRC) show more than 20,000 people benefited from the new group in its first year, achieving a collective saving of Â£ 3.1 billion.
Since HMRC’s numbers are a few years behind, it will be some time before we see the exact impact of subsequent increases in the new property allowance. However, land registry data shows the number of homes sold over the combined strips fell to just 13% in 2019.
This is good news if you are concerned about the IHT and your main asset is your property. This is especially true if you are married or in a civil partnership, as less than 3% of properties sold in 2019/20 were over Â£ 950,000 – the maximum combined allowance for a couple.
Unfortunately, these proportions are for England and Wales as a whole and vary depending on where you are in the country. Some regions will still have a much higher chance of paying the IHT.
Where are the inheritance tax hotspots?
We used land register data to see which local authorities in England and Wales have the highest proportion of properties sold above the new Â£ 500,000 threshold.
As you can see from the map, the red areas – the ones with the highest concentration of half a million pound homes – tend to cluster around London and the surrounding counties.
In fact, nine of the 10 authorities with the highest proportion of Â£ 500,000 properties are in London.
Kensington and Chelsea lead the list, with a whopping 85% of properties selling for over Â£ 500,000. In fact, 58% of the properties sell for over Â£ 1million.
No wonder Kensington and Chelsea generate twice as much IHT revenue as the entire North East combined.
While the high prices aren’t limited to London, they point to a north-south divide.
Only two of the top 100 local authorities with the highest percentage of properties sold for over Â£ 500,000 are in the north: Harrogate and Trafford. The rest are in the south and the vast majority in the original counties: with countries like Surrey, Buckinghamshire and Hertfordshire all well represented.
The point is, if you are in the north of the country and your main asset is your property, your chances of paying inheritance tax are much lower.
Outside of London and the South East, it’s usually the more scenic areas that attract the highest prices. The rolling hills of the Cotswolds and the quiet confines of the New Forest, for example, prompt more than a fifth of buyers to part with Â£ 500,000 or more for a house.
You can also search our table below, to see where your local authority ranks, and whether it is above or below the 13% average for England and Wales.
ÂÂÂWill the coronavirus affect inheritance tax allowances?
From the next tax year, the zero rate bracket for residency will continue to increase, but based on the Consumer Price Index (CPI) rather than by Â£ 25,000.
HMRC forecasts show that the number of people paying IHT is expected to gradually increase as a result. This is because house prices are expected to rise faster than inflation.
However, the government’s forecast was made before the coronavirus, which had a profound effect on the economy.
While there are signs that the housing market is recovering, if prices rise more slowly than expected, it will mean that the increase in the number of people paying IHT will happen more slowly, if at all.
Again, this assumes that no changes are made to the inheritance tax rules.
While there is currently no indication that Rishi Sunak will make any changes to IHT, this remains one of the many levers he could pull to help recoup the cost of quarantining the country. We will find out in the next fall budget.
Cut your bill
If your estate exceeds the IHT threshold, you may want to consider donating money to lower your bill. Here are the ways you can donate money without the IHT being a problem.
Gifts under Â£ 3,000 – you can donate up to Â£ 3,000 each year without affecting your zero rate bracket. Any unused gift allowance can be carried over, but only for one year.
Gifts over Â£ 3,000 – gifts over Â£ 3,000 could be tax exempt, but only if you live more than seven years after making them. These are known as âpotentially exempt transfersâ (PET). Failed PETs are subject to ‘phase-in relief’, meaning that tax can reach 40% if death occurs within three years of donation, or as little as 8% if death occurs between six and seven. years after the transfer.
Wedding gifts – You can give a wedding gift of up to Â£ 1,000 tax-free to anyone, up to Â£ 2,500 for grandchildren or Â£ 5,000 for children.
Gifts under Â£ 250 – You can give gifts of up to Â£ 250 to as many people as you want each year, as long as you don’t give them other exempt gifts.
Donations to charities – A donation of 10% or more to charity means that the rate applied to the taxable portion of your estate goes from 40% to 36%.
For a full rundown on how you can lower your tax bill, check out our guide on how to avoid inheritance tax.