Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Strategy. Read the original article for full details.
Frozen Tax Bands and Rising Property Values Increase IHT Exposure
Inheritance Tax (IHT) in the UK, once seen as a concern only for the wealthy, is now affecting a broader range of families due to a combination of frozen tax allowances and rising property values. According to Mortgage Strategy, the Inheritance Tax Nil Rate Band has remained at £325,000 since 2009, and the additional Residence Nil Rate Band (RNRB) of up to £175,000 per person has also not changed. For married couples and civil partners, these allowances can allow up to £1 million to pass free of inheritance tax when a family home is left to direct descendants.
However, as property prices have increased, many homeowners now find their estates exceeding these thresholds. Properties purchased decades ago for much less may now be valued at £700,000, £900,000, or even over £1 million. When combined with savings, investments, and pension wealth, more families are facing potential inheritance tax charges, even if their lifestyle has not changed significantly. Any amount above the available thresholds may be taxed at 40%.
Residence Nil Rate Band Tapering and Legislative Changes
The RNRB is subject to a tapering rule: once an estate exceeds £2 million, the allowance reduces by £1 for every £2 above the threshold. For example, an estate worth £2.1 million loses £50,000 of the RNRB, and by £2.35 million, the allowance is eliminated entirely. This can result in a significant inheritance tax liability for families in areas with high property inflation.
From April 2027, the government plans to include unused pension funds and certain pension death benefits within the scope of inheritance tax. Historically, pensions have been a tax-efficient way to pass on wealth, but the proposed changes could mean that assets previously outside the IHT system may become subject to a 40% charge.
Impact on Letting Agents and Inventory Clerks
For letting agents and inventory clerks, these changes highlight the growing importance of understanding property values and their impact on clients' estates. The silent effect of property inflation means that even modest homeowners may now face inheritance tax considerations, making accurate property valuations and record-keeping increasingly relevant.
Source: Mortgage Strategy