32% jump in number of local authorities where homebuyers are automatically hit with inheritance tax

New insight from Yopa, the full-service estate agents, has revealed that despite an increase in inheritance tax thresholds over the last 20 years, higher rates of house price growth mean that homebuyers across 36% all UK local authorities are now automatically liable to pay inheritance tax based on the value of their bricks and mortar estate alone, versus just 4% two decades ago. 

Sir Keir Starmer is due to deliver his government's first Autumn Budget on 30th October, and he has already said that it is going to be 'painful' for many to hear. As such, new taxes and increases are expected to be announced, and changes to inheritance tax rules are widely predicted to be included.

Analysis of HMRC receipts data by Yopa shows that the government has already been benefitting from a notable increase in the level of inheritance tax it receives, largely due to strong upward growth in house prices.

 

Just 4% of homebuyers hit with inheritance tax 20 years ago

20 years ago, inheritance tax was based on just one threshold of £263,000, meaning if your estate exceeded this threshold in value, inheritance tax was owed.

The analysis by Yopa shows that at this time (2004 to 2005 financial year), HMRC collected £2.9bn per year in inheritance tax receipts.

Whilst the value of an estate is based on more than just the value of a home, our properties often form the majority of our estate as the most expensive asset we own and additional analysis of house price data by Yopa shows that, back in 2004/05, just 4% of UK local authorities were home to an average house price of £263,000 or more. Meaning that the average buyer in these areas was automatically pulled into inheritance tax liability based on the value of their home.

 

Increased inheritance tax threshold has done little to help

Today, the initial threshold at which you become liable for inheritance tax has increased from £263,000 to £325,000 - a 24% increase.

Despite this increase in inheritance tax thresholds, the average UK house price has also increased by an estimated 88% since 2004/05.

 

36% of all homebuyers today automatically liable for inheritance tax

This means that, today, 36% of all UK local authorities are now home to an average house price above the current threshold of £325,000 and would see homebuyers become automatically liable for inheritance tax based on the value of their bricks and mortar estate alone.

No surprise then, that today, HMRC collects £7.5bn a year in inheritance tax receipts - an increase of 157% versus 20 years ago.

 

What can you do to sidestep inheritance tax?

If your estate exceeds this but you leave everything in excess of the threshold to your spouse, civil partner, charity, or amateur sports team, there is no tax to pay.

If you leave your home to your children or grandchildren, the £325,000 threshold increases to £500,000 and the analysis by Yopa shows that in the current market, this means that 92% of all local authorities would be exempt from inheritance tax based on the current average house price alone.

However, Labour has made several spending commitments in its manifesto, and changes to inheritance tax would certainly help them fund their election pledge.

 

Yopa's National Franchise Director, Steve Anderson, commented:

"It's not just the archaic tax grab of stamp duty land tax where the government has benefited due to escalating house prices over the last two decades, with the sums gained from inheritance tax also climbing consistently in line with increasing property values.

It now looks as though this tax take could potentially increase even further as we head towards an Autumn Budget that is being positioned as a 'painful' one for UK taxpayers.

As it stands, the only official statement concerning inheritance tax from the Labour manifesto focusses around ending the use of offshore trusts to avoid inheritance tax, which would mean that the average homeowner has little to worry about.

However, doing so would likely require a hefty rewrite of inheritance tax legislation and so we can't be sure what might materialise from this until the ink has dried.

Regardless, we've seen house prices continue to stabilise so far this year and this means that many more homeowners could be pulled into inheritance tax thresholds as house prices continue to increase -  even without any changes being made to current legislation."