We have a lot to thank the French for; steak-frites, Cognac and Arsene Wenger. However, one unwelcome French import has been Inheritance Tax (IHT).
Tax on death was first officially introduced in England in 1796. Back then, the tax was known as ‘legacy, succession and Estate duties’ and was introduced as a way of funding war against the French. From sinister beginnings, it developed into a way of redistributing wealth from the very richest in society to the poorer members. This followed the philosophy of the French Revolution ideals of a fairer society.
IHT has been set as low as £20 in the Nineteenth century but today it is set at £325,000 for a single person and £650,000 for a married couple. IHT is often thought of as a ‘rich man’s tax’, 'a nice problem to have' and one that doesn’t affect ‘ordinary’ people. However, as house prices have increased, this view has become increasingly redundant as the number of ordinary people caught by tax increases.
In the South East of England, the average price of a house is now over £326,000 which means it has overtaken the IHT tax free allowance of an individual person. As the South East constitutes between 30% and 40% of the population of England (depending upon the definition used), it means over 22 million people may have to deal with IHT at some point in their lives. Currently, over half of all the IHT paid in England is paid by families living in the South East, with the average amount paid standing at over £160,000.
The problem is most acute in wealthier areas, particularly in London with the average house price in Belgravia standing at over £5 million. Although most people will expect the inhabitants of Belgravia to pay tax on their mansions, the housing boom has also affected traditionally affordable areas such as Hackney. Here, a comparatively modest semi-detached will set you back over £550,000, which is £225,000 over the individual tax free allowance. This has caused many ordinary people to be caught out by tax simply because they are unaware of the potential IHT consequences caused by a rise in the value of their home.
Unfortunately, this a problem that is no longer confined to billionaire bankers in their Belgravia mansions. As the problem has spread from the city to the countryside, it has also started to affect families that usually have no need to make plans to avoid IHT.
In the Surrey ‘golden triangle’ of Godalming, Oxshott and Virginia Water, asking prices are averaging over £1,800,000. Across the border in neighbouring Buckinghamshire, house prices in Beaconsfield, Chalfont St Peter and Gerard’s Cross are over £1,200,000.
Even in the more affordable counties such as Essex, detached homes are now averaging over £900,000 in the Epping Forest golden triangle of Loughton, Chigwell and Buckhurst Hill.
Although the boom in house prices has mainly affected London and the South East, the North of England is now starting to experience the same problems. The northern golden triangle of Alderley Edge, Hale Barns and Knutsford is fast catching up with its southern counterparts, with average asking prices now reaching £600,000. The recent move of the BBC to Manchester can only continue the trend towards higher and higher prices.
An unintended consequence of the house price boom is that many people are now caught by Inheritance Tax. Unfortunately, this problem is made worse by many people being unaware of the potential problem looming on the horizon. This has caused many hardworking families to be caught in an Inheritance Tax trap of being unable to avoid it.
As is often the case in life, recognising the problem early and taking necessary action can, in many cases, mean IHT is completely avoided. Inheritance Planning is becoming increasingly important and must be considered as part of the process when buying or selling a house. This is especially true for families living in London or the South East where the average house is already worth more than the tax free allowance.
To arrange a discussion about IHT, please get in touch with Paul Clark on 01625 523988 or mail@JBGass.com