The UK is not the easiest place to live at the present moment. A cost-of-living crisis continues to heavily impact household budgets over a year on from its beginnings in the energy market, while property prices have only just begun to sink after three years of record growth – a fact rendered sinister by the relative stagnation of wages. But there is a secondary impact to the rise of property values, relating to inheritance tax.
Inheritance Tax
First, it is important to understand exactly how Inheritance Tax works as a mechanism. Inheritance Tax applies to the estate of an individual after their death. Generally speaking, it is a lump tax on the value of a deceased person’s total estate, prior to being divided between beneficiaries according to the particulars of their will. There are two distinct tax bands for Inheritance Tax: a nil-rate band for the first £325,000 of an estate’s value, and a 40% tax rate applicable to any additional value.
It is the executor of the will’s responsibility to pay the Inheritance Tax owed from the estate; that is, beneficiaries are not expected to handle the tax liability of their portion of the estate, as it is already deducted from the estate. In some cases, though, beneficiaries do inherit tax responsibility – typically if a valuable gift was given within seven years of the deceased’s passing.
Inflation and the Property Market
It is commonly the case that a deceased person’s most valuable asset is their home. Property is, overall, a stable investment – moreover, it is a strong choice for investment owing to its inflation-beating growth over time. House prices have been rising for decades, checked occasionally by market busts as in the 1990s.
Today, it is much harder for the average earner to afford property than it was in the 20th century. The cost-of-living crisis has had undeniable impacts on affordability for households and first-time buyers, making it difficult for many to get on the property ladder. But, more impactfully, high demand at the outset of the coronavirus pandemic in 2020 – supplemented by government interventions to remove Stamp Duty costs – caused a rampant rise in property values over a two-year period.
The Tax Threshold
But what does this have to do with inheritance? As outlined earlier, the threshold for Inheritance Tax liability is £325,000. This is a figure which has remained in place since April 2009, and which the government has committed to freezing until April 2028. According to the ONS, the average property value in England is £316,000 – a 14% rise on the previous year, and a rise which puts the average homeowner’s estate value above the Inheritance Tax threshold.
This has created an Inheritance Tax ‘net’ for middle earners. The executor of a given will is required to administrate the payment of an estate’s tax liability, a not-insignificant cost that many are unable to swallow ahead of probate being completed. As such, more executors are asking for an executor’s loan to offset the financial impact.
What Does the Future Hold?
The tax freeze indicates that there is little light at the end of the tunnel for middle earners, and that tax liability will continue to factor into a larger number of households. But house prices are also falling, after their precipitous rise was halted by hikes in interest rates towards the end of 2022. Tax liabilities may level out in the medium term, then, before the government sets a new threshold for Inheritance Tax.
Image: Inheritance tax by Nick Youngson CC BY-SA 3.0 Pix4free
