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Soaring house prices and the Inheritance Tax trap

House prices are likely to outstrip pay rises for at least the next five years and possibly for decades to come.   That’s not the silly season sensationalism of a tabloid journalist.  Rather it is the published opinion of the government’s official forecaster, the Office for Budget Responsibility.

Figures released this month show that UK house prices have risen 1% in June and are up 11.8% from a year earlier.

Meanwhile, the threshold at which the value of an individual’s estate becomes liable to Inheritance Tax (IHT) on death remains £325,000.  It has been fixed at that level since 6 April 2009, and the government has no plans to change it until at least April 2019.

The average London house price, along with the values of very many fairly modest homes up and down the land, is now more than £325,000.

Successive governments have brought in ever-tighter anti-avoidance rules to stop people passing their houses to the next generation free of IHT in their lifetimes, while continuing to live in them.

The effect of all this is obvious.  More and more people’s estates are being charged to IHT, at a hefty 40% rate.  Currently, about 1 in 20 estates pay IHT.  That rate is set to double to 1 in 10 by 2019.

There has never been more reason to review your estate, and make sure you understand what will happen to it when life’s two inevitables, death and taxes, finally meet up.

In the meantime, if you are one of those who enjoys firing off the odd letter to your MP, it’s worth noting that the threshold at which IHT starts to bite in the UK is one of the harshest in the Western world.  For example, in the US you can have an estate worth around £3.2 million before you will pay tax; and death duties have been abolished altogether in Australia and New Zealand.  Something worth lobbying about in the run up to next year’s general election, perhaps?

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