House prices to rise 30% in next 5 years. What’s your IHT liability?

Rightmove, Britain’s biggest property website, has forecast that prices will increase by 30% over the next five years to an average of £318,000 in England and Wales and more than £715,000 in London. It will be areas of the country outside the capital, however, that will see greater percentage price rises. Rightmove predicts that Southampton will see the fastest house price increases in the country, with values expected to jump 43% by 2019 – adding nearly £100,000 to local prices – while Luton, Brighton and Swindon will not be far behind. Rightmove used independent consultancy Oxford Economics to calculate the figures.

The driver behind the increase in prices in the south-east will be the ripple effect of high London prices spreading out through the home counties. Rightmove said the parts of the capital that have seen the greatest price increases in the last five years will see the smallest in the coming five years.

But what has this to do with your Inheritance Tax liability?

Inheritance Tax (IHT) is a tax on the money or possessions you leave behind when you die, including any property you own. A certain amount can be passed to your inheritors without being taxed; this is known as your ‘tax-free allowance’ or ‘threshold’. The threshold for 2014-2015 is £325,000, the same as it has been since 2010-11. It will stay that way until at least 2017. So if the value of your property goes up in the next few years, it may well push you over the IHT threshold, if you are not over it already.

Who pays the bill?
Inheritance tax is generally paid from your estate, which comprises everything you own (money, property and investments), minus everything you owe (mortgage, loans, credit card bills) at the time of your death (including funeral expenses).

If you have made any gifts during the seven years before your death, the recipients of those gifts must pay the inheritance tax due. If they refuse to pay – or are unable to – the tax due is paid by your estate.

Thresholds and tax rate
If you are single and die leaving an estate worth over £325,000, then 40% tax is due on anything above £325,000. For example, if you leave an estate worth £600,000 then the tax bill will be £600,000 minus the threshold (£325,000) = £275,000 which is taxed at 40% = a liability of £110,000 that has to be paid to HMRC prior to the estate being distributed to the beneficiaries.

If you are married or in a civil partnership, the rules are slightly different. Married couples and civil partners are allowed to pass their money and possessions to each other tax-free. Since October 2007, the surviving partner can use both tax-free allowances (currently £650,000).

Use the Inheritance Tax Calculator to work out your IHT liability.

This calculator (a link to the ‘This Is Money’ website) is handy way of working out your approximate inheritance tax (IHT) liability. But it doesn’t show you how to use financial planning to mitigate the ultimate tax bill your estate will have to pay. You need an independent financial advisor for that.

What can you do?
Why not take advice from an independent financial advisor now? He will be able to assess your position and, if appropriate, recommend the best way of minimising your future IHT liability, while you still have time to do something about it.