Inheritance tax warning as ‘ordinary families’ dragged into 40 percent tax net

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Inheritance tax explained by Interactive Investor expert

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Inheritance tax is commonly loathed by Britons, many of whom describe it as a death tax. It is paid on the value of an income above a certain threshold – usually £325,000 – when a person dies.

The inheritance tax rate is at 40 percent, and many are now finding themselves pulled into a levy which was commonly thought of as a wealth tax.

This has been attributed to soaring inflation which has seen the value of property and assets rise over time.

With individuals potentially earning more, and their assets also gaining in value, they could be propelled over the typical £325,000 limit.

The IHT nil rate band – frozen at £325,00 since 2009 – is worth just £205,431 today in real terms, according to JMW Solicitors.

Meanwhile, IHT receipts have continued to rise, according to the latest data.

The Treasury receive £1.1billion from death duties across April and May – up 10 percent when compared to a year ago.

According to HMRC figures, the Treasury collected £5.9billion in IHT during 2021 – an increase on the £5.2billion recorded in 2020.

The nil-rate band is a tax-free IHT allowance which permits a person’s beneficiaries to inherit up to £325,000 of the estate without incurring any levy. 

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However, inheritance tax thresholds such as the nil-rate band have been frozen until 2026, compounding the issue further. 

Joe Cobb, Partner and Head of Private Client at JMW Solicitors, said: “At a time when the average home in Britain costs £292,000, some may say that it is time the nil-rate band and the residence nil-rate band were looked at again.

“Today, the IHT nil-rate band is worth a fraction of what is was 13 years ago – £125,000 less in real terms.

“This has resulted thousands of families being subjected to the inheritance tax rate of 40 percent on that additional amount.”

However, it is not only the nil-rate band that Britons will have to reckon with.

There is also a nil-rate band to consider when it comes to property, known as the Residence nil-rate band.

Mr Cobb also highlighted this has remained frozen at a value of £175,000.

This is despite soaring house prices which do not appear to be slowing down any time soon.

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He added: “In 2009 the average home cost £157,200, yet in London the average house price today is £523,666. 

“In the North East, the value is £154,913. 

“The family home is usually the biggest asset within the average estate.

“So the tax burden on families in the South is notably larger than those living elsewhere in the country.”

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