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London Property Market 21 August 2017

Rising property prices cause record inheritance tax payments

The government collected a record £4.84 billion from Inheritance tax (IHT) during 2016/17 tax year, much of which will have been from rising property prices according to experts. This is 4% higher than the previous year - when £4.67 billion was raised - according to official statistics released by HM Revenue & Customs (HMRC), and by next year this figure is expected to exceed £5bn*.

Despite the average UK house price rising 41% since Jan 2009**, the inheritance tax threshold has remained the same during this time, meaning a record number of families each year are hit by the tax. To address this issue, from April 2017 the government began phasing in additional tax-free allowance to the existing £325,000 per person, which by 2021 will allow homeowners to bequeath an extra £175,000 in property wealth. This means a new allowance for property owners of £500,000 – or £1million for couples.

Higher stamp duty has also been blamed for discouraging elderly people to downsize, meaning they may pay more inheritance tax as more of their money will be tied up in property, leaving them with less to give away. Although rising property prices have been a factor in higher IHT receipts, experts say with more sophisticated financial planning various methods can be used to reduce a person's IHT liability including gifting wealth earlier, using available exemptions and considering different investments types.

There are now growing calls for a review of stamp duty which is blamed for stalling the housing market, especially in London. The Office for Budget Responsibility has said that stamp duty is putting the economy at risk because the owners of more expensive properties now pay so much tax, and an unnamed Cabinet Minister has urged the Chancellor to cut rates.

A recent study by the London School of Economics and the VATT Institute for Economic Research is calling for stamp duty to be removed altogether. This seems unlikely to happen as receipts in the 30 months since December 2014 were 18.6% higher than in the preceding 30-month period. However, there is a small chance that the Chancellor will make some concession in the Autumn Budget.