Buying a home in a conservation area: What you need to know before you proceed
Inheritance Tax (IHT) has long been described as a tax on the wealthy, but the reality for a growing number of homeowners across England and Wales, looks rather different.
The nil-rate band, the threshold below which no IHT is payable, has been fixed at £325,000 since April 2009 and is frozen until at least April 2031.
In the same period, average house prices have risen sharply and many families who never considered themselves particularly wealthy now find their estates sitting well above that figure.
When the residence nil-rate band is factored in, an individual can currently pass on up to £500,000 free of IHT, provided the family home passes to direct descendants.
This means a qualifying couple can have an allowance of up to £1 million.
These figures may sound generous, but there is a significant catch for higher-value estates.
The taper that many miss
Once an estate is worth more than £2 million, the residence nil-rate band begins to reduce at a rate of £1 for every £2 over that threshold.
For an individual, it tapers to zero at approximately £2.35 million. For a couple, it disappears entirely at around £2.7 million.
This taper threshold is also frozen until April 2031. A family home worth £1.5 million, when combined with savings, investments, life insurance not written in trust and other assets, can bring an estate well past the point at which the residence nil-rate band is reduced or lost entirely.
The practical consequence is that more homeowners in higher-value areas are crossing the IHT threshold not because their total wealth has increased dramatically, but because the bands have stood still while their property values have not.
HMRC collected a record £7.5 billion in IHT receipts in the 2023/24 tax year, up from £5.7 billion just four years earlier and the Office for Budget Responsibility projects receipts could reach £14 billion by 2030.
Changes to pension and investment assets
The position is set to become even more complex, as from April 2027, unspent defined contribution pension funds will be brought into the scope of IHT for the first time.
For anyone who has been treating their pension as a tax-efficient inheritance vehicle, the financial implications will need to be revisited carefully.
In addition, from April 2026, AIM-listed shares, which historically attracted 100 per cent IHT relief after a two-year holding period, now attract relief at only 50 per cent, resulting in an effective rate of 20 per cent on those holdings. The same rule applies to agricultural land and/or business assets.
What can be done
There is no single solution to an IHT exposure, but there are a number of well-established tools that can reduce a liability when put in place early and reviewed regularly. These include:
- Lifetime gifting, which uses the seven-year rule and annual gift exemptions to move value out of the estate over time
- Life insurance written in trust, which can be used to cover an anticipated IHT bill without forcing a sale of the family home
- Reviewing how the family home is owned and ensuring Wills are structured to make full use of both spouses’ allowances
- Considering the role of trusts in ring-fencing assets for the next generation while providing flexibility for the surviving spouse
The key point is that the options available narrow considerably once the IHT position becomes urgent.
Early planning, informed by a proper review of the estate as a whole, is far more effective than acting under time pressure.
If you would like to discuss how the current IHT freeze might affect your estate, our private client team would be happy to help. Please get in touch to arrange a confidential conversation.
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