Home-owning families are facing surging inheritance tax (IHT) bills as house prices continue to rise precipitously, new data from Wealth Club shows.

Analysis from the firm shows that the average IHT bill will likely exceed £266,000 in the 2022/2023 financial year. This is thanks to fast-rising property prices in the past two years and represents a 27% increase on pre-pandemic levels.

House prices have risen spectacularly during the pandemic, with prices up 10% in 2021 alone, according to the Office for National Statistics (ONS). House prices are now slowing, according to Zoopla, but still rising around 8.4% year-on-year in March.

The simple fact is homeowners are increasingly falling into the IHT trap, thanks simply to having invested in buying their own home. IHT receipts for the Government have increased every year in the last decade and are up by 57% since 2012/2013.

What to do about IHT

Although there is essentially an unavoidable aspect to paying IHT and associated levies, there are mitigations that can be made to lessen the tax burden on your estate.

The nil rate band for IHT stands at £325,000 and hasn’t changed since 2011. There is also a residence nil-rate band of up to £175,000 over the initial £325,000.

If you’re married these rates can essentially be combined, meaning a married couple can pass on a property worth up to £1 million effectively – or a property worth £350,000 and other assets worth £650,000.

But the reason why more estates fall into paying IHT every year is because these nil-rate bands have been frozen for over a decade. As assets you won increase in value, the likelihood of breaching the band gets closer.

Preparing for IHT takes good wealth planning, well in advance.

Gifting is a really good way to do this as you’re not liable to pay any IHT if you live seven years after a gift, and you can give up to £3,000 in gifts each tax year without incurring any liabilities no matter how long you live after. You can also make any gift ‘out of income’ as long as it doesn’t materially affect your regular earnings from a salary or investments.

There is also a small gifts allowance whereby you can give £250 to as many people as you like in a tax year without any liability. If you have a child getting married you can gift them £5,000, or for a grandchild – £2,500.

But even earlier preparations than this can be made. Pensions for example are exempt from IHT, so holding a good deal of your wealth inside a pension can be very efficient for tax purposes. This is a really important consideration when you’re still in the accumulation phase of your wealth journey, making balancing the amount you are saving into an ISA or pension critical. However, those with substantial pension assets must be aware of the Lifetime Allowance which is a separate tax charge which can become payable on death.

Another method is taking out a life insurance policy which is written into trust, thus not forming a part of your estate. HMRC treats premiums as a lifetime gift, but if they’re below the annual £3,000 exemption or the gifts are out of normal income exemption, then they are considered tax free.

There are other, perhaps more complex ways to mitigate a large IHT bill. If you would like to discuss your options, or for anything else relating to wealth planning, don’t hesitate to get in touch with your financial adviser.