There has been a lot in the press recently about inflation pushing people into higher income tax brackets. But what about Inheritance Tax?
The Inheritance Tax Act was brought in in 1984, where the world was a different place. Many of the rates have been left unchanged since introduction.
Take the exemption for marriage. A total of £5,000 can be given by a parent to their child on occasion of marriage without it being a Potentially Exempt Transfer.
In 1984, the average house price was £29,675. The average cost of a wedding was about £1,150. Therefore a £10,000 gift (£5,000 from both sets of parents) would give the married couple enough to easily cover the cost of a wedding plus a deposit for a house. Now, £10,000 will get you less than the half the cost of the wedding itself (average cost is now £24,109). If this allowance had increased with inflation it would be £30,960.
The same is true of the Annual Exemption, the amount an individual can gift without it being a Potentially Exempt Transfer. It has stood at £3,000 since 1984. In today’s money, that is £9,288.
Finally, let’s look at the Nil Rate Band (the value below which assets can be passed on free of IHT) and the Residence Nil Rate Band (applicable where a main home is passed to a lineal descendant). Whilst these have increased over time the Nil Rate Band has been stuck at £325,000 since 2009. In today’s money, that is £492,965.
The Residence Nil Rate Band has been stuck at £175,000 since April 2021. Back then, the average house price was £250,210. It is now £289,818.
Both the Nil Rate Band and the Residence Nil Rate Band will remain at this level until April 2028.
An individual who is unmarried and owns their home outright is likely be subject to IHT. As an example, the average price of a property in London is now £741,126, far in excess of the combined Nil Rate Band and Resident Nil Rate Band (being £500,000).
At present, only around 4% of estates pay any IHT. But things are changing rapidly.
Sources below:
https://www.propertyinvestmentproject.co.uk/property-statistics/nationwide-average-house-price/
https://www.compareweddinginsurance.org.uk/blog/average-cost-uk-wedding.php
https://www.gov.uk/check-house-price-trends
https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
https://www.weddingideasmag.com/wedding-costs-decades/