Property makes up half the wealth of estates in London paying inheritance tax (IHT) – around twice as much as most other regions, according to a retirement specialist.
An HMRC Freedom of Information (FOI) request from retirement specialist Just Group revealed that in 2019-20, the latest financial year of available data, property accounted for 50 per cent of the wealth in estates in London paying inheritance tax, with an average value of over £820,000.
The average estate value in the capital was over £1.4m, nearly £200,000 higher than the South East which was the region with the second highest average estate values.
The proportion of housing wealth in IHT-paying estates dropped to 39 per cent in the South East, at £604,000, 36 per cent in the East of England (£524,000), 32 per cent in the South West (£474,000) and 31 per cent in the West Midlands (£398,000) but then falls to a quarter or less in all other regions.
Stephen Lowe, group communications director at the retirement specialist Just Group, said the data was taken from the period up to the outbreak of Covid-19.
He explained that house prices rose significantly during the pandemic, with homeowners over the age of 55 benefitting from £1bn of property value growth every single day between March 2020 and June 2022.
“This is likely to have tipped many more estates over the IHT threshold, perhaps without the homeowners even realising. It is another reminder of why it is so important that people regularly assess the value of their estate, including an up-to-date valuation of their property.”
Rachael Griffin, tax and financial planning expert at Quilter said the UK Government’s decision to freeze Iheritance Tax thresholds until at least 2027/28 would net an additional £1bn in tax reciepts according to OBR forecasts.
She added: “Inheritance Tax is fast becoming a profitable area for the government, largely due to the rapid rise in house prices seen in recent years causing more people to tip over the threshold.”
She said the Institute for Fiscal Studies had called for reform to the tax treatment of pensions on death on the grounds of fairness at the end of last year because deemed pensions to be ‘a highly effective way of avoiding inheritance tax’.
“But such reform would likely only make things fairer for the exchequer and not for bereaved families. Making pensions subject to IHT would be counter-intuitive to encouraging people to save for their retirement, and with the lack of certainty on the direction of social care it is crucial that people continue to put their own financial plans in place.
“Given IHT thresholds have already been frozen, more and more people will already be dragged into paying what is often regarded as one of the nation’s most hated taxes, let alone if pensions were to be brought into the mix. IHT has traditionally been viewed as a tax on wealthier individuals, but the number of people caught in the IHT net has been rising steadily for some time now and this number will only continue to rise as we move further into the freeze.
“Where possible, you should seek professional financial advice to help mitigate IHT costs through careful planning – particularly for the more complex areas such as the Residence Nil Rate Band which is not freely available and has restrictions on how and when it can be used.”