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Rising property prices mean more will be on the hook for inheritance tax

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This year’s runaway house prices rises mean that more people could find themselves liable for inheritance tax when they are left a property, money or other assets after someone has died.

New figures from HMRC show that inheritance receipts in April to May 2021 were £966million – £340million higher than the same period last year, due in part to an increase in the value of many people’s homes.  

Financial advisers say significant increases in property values may mean that more estates will nudge past the threshold where inheritance tax is due, without them realising it.   

Tilney, the financial planning firm, has issued a stark warning about IHT – saying rising property prices, along with the buoyancy of the stock market, could draw more people into the ‘inheritance tax web’.

Taxing times: House prices rises have pushed homeowners over the inheritance tax threshold

Taxing times: House prices rises have pushed homeowners over the inheritance tax threshold

The latest official figures from HM Land Registry, which reported on house sales in April, showed that house prices had risen 8.9 per cent in the past year to an average of £250,772. 

If you give away your family home to your children, £500,000 is the maximum value that your estate can reach before you start being liable for inheritance tax – or up £1million if you are a surviving spouse or civil partner who already inherited the property from them.

If you don’t fall into this category, your limit is £325,000 – the standard nil-rate band.

This is Money analysis of Land Registry price paid data shows that more than 19,500 homes were bought for over £500,000 in the first quarter of this year.  

In the first quarter of 2010, the first full year after the inheritance tax threshold was last changed, the figure was less than half that, 7,800. 

The nil rate band is fixed, which means that for every £10,000 the value of the property grows over £325,000, the owners’ inheritance liability increases by £4,000. 

Compounding the situation is the fact that the threshold will not change for at least five years. 

House prices have increased by nearly 15 per cent in some UK areas - so those hoping to pass their home on after they die could be unwittingly setting family up for an inheritance tax trap

House prices have increased by nearly 15 per cent in some UK areas – so those hoping to pass their home on after they die could be unwittingly setting family up for an inheritance tax trap  

The Government recently took the decision to freeze the £325,000 nil-rate band until at least April 2026.

‘The freeze means that even before any fresh reforms to IHT are introduced, taxpayers could be stung if there is even a modest increase in their estates – which is quite possible given that property and share prices have been on the rise,’ said Ian Dyall, head of estate planning at Tilney.

The nil rate band has remained at £325,000 per person since April 2009, meaning that it will have remained unchanged for 17 years by the time the freeze ends.

However, the Government did bring in the £500,000 nil rate band for those passing on their main home to their children in 2017. 

Inheritance tax: who needs to pay? 

Inheritance tax is a tax on the estate (property, money and possessions) of someone who has died.

The standard rate is 40 per cent on anything above the threshold of £325,000.

There’s normally no inheritance tax to pay if either:

  • The value of your estate is below the £325,000 threshold 
  • You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If you give away your family home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000. This because of the ‘residence nil rate band’ which adds £175,000 to your allowance.

This relief tapers away if the deceased’s total estate is worth more than £2million.

If you’re married or in a civil partnership and you leave your estate to them, your threshold can be added to your partner’s when you die, or vice versa. This means the joint threshold can be as much as £1million. 

There are certain exemptions and reductions, for example if you leave money to charity or if you are passing on ownership of a business.

Tilney points out that, had the £325,000 allowance been adjusted for consumer price index inflation each year, it would now be approximately £414,000 per person.

If inflation continues to rise, the gap between the inheritance tax threshold and the value of people’s estates will grow even wider.  

Dyall added: ‘This is a reminder of the impact of inflation, which has started to rear its head again, evidenced by the latest consumer price index inflation figures out today which rose to 2.1 per cent in May, up from 1.5 per cent in April.’ 

Some are already seeking advice on inheritance tax and what their descendants might have to pay after they have died.  

According to The Openwork Partnership, one of the UK’s largest networks of financial advisers, there was a 38 per cent spike in demand for advice on inheritance tax planning in the past year, with more than one in ten clients wanting to discuss it.

Of these, 43 per cent said rising property prices was one of their reasons for seeking inheritance tax advice.

Antony Cousins, director of wealth management at SPF Private Clients, said his firm had also seen an increase in enquiries on the topic. 

‘Many more people could be hit by inheritance tax, thanks to rising property prices and a freezing of the nil-rate.

‘We have seen a significant increase in enquiries in this area over the past 12 to 24 months, particularly as Covid has made people think more about their mortality.’

He says that there are five main ways that those worried about inheritance tax can reduce their liability: spending significant amounts to reduce their overall estate; gifting money or assets to children and grandchildren; insuring against their inheritance tax liability, for example on a life assurance policy; setting up suitable trusts; and investing in an asset that qualifies for business property relief.

You can claim business property relief on property and buildings, unlisted shares and machinery that are associated with the running of a business, and if eligible the inheritance relief will be between 50 and 100 per cent. 

‘Everyone is different and generally it’s not just one of these solutions which suits best but a combination of these,’ says Cousins. 

‘Given that more people could find themselves hit by inheritance tax, it is important to take advice and to plan ahead.’ 

More older people are seeking advice about inheritance tax, according to experts

More older people are seeking advice about inheritance tax, according to experts

Those with more valuable estates have an extra complication to look out for, as the exemption for passing on your main home to your children tapers away when the deceased’s estate is worth more than £2million.   

Dyall explains: ‘There is an additional trap to consider, which means that some people will pay inheritance tax at an effective rate of 60 per cent on the growth. 

‘If the growth on their home pushes them above £2million, when added to their other assets, then for every £2 they exceed the £2million threshold, they will lose £1 of allowance. 

‘This results in an effective rate of tax of 60 per cent on the growth. So it is important to keep an eye on how the growth in the value of their home is affecting the bigger picture.’ 

How much does the Government make from inheritance tax?

How much does the Government make from inheritance tax? 
Tax year   Government inheritance tax receipts (£billion)
2009/10 £2.38billion
2010/11  £2.72billion 
2011/12  £2.90billion 
2012/13  £3.11billion 
2013/14  £3.40billion 
2014/15  £3.80billion 
2015/16  £4.65billion 
2016/17  £4.82billion 
2017/18  £5.21billion 
2018/19  £5.36billion 
2019/20  £5.12billion 
2020/21  £5.33billion 
Source: HMRC/NFU Mutual  

HMRC has revealed that it collected £5.33billion from inheritance tax in the 2020-21 financial year, up from £5.12billion the year before.

Since the tax-free allowance was raised to £325,000 in 2009, the amount of inheritance tax the Government pockets has more than doubled.  

Meanwhile, the average UK house price has increased by around 60 per cent since 2009, so a £325,000 house would now be worth around £520,000.

Though its income from the tax is on the increase, some experts predict that the Treasury could increase IHT even further as it seeks to recoup funds spent on emergency support related to the Coronavirus pandemic.

Julia Rosenbloom, tax partner at accountants Smith & Williamson, says: ‘Rumours have been swelling since the weekend about a plan by the Chancellor to launch a pensions tax raid in an Autumn Budget. 

‘If it is confirmed that a Budget will be held later this year, then it wouldn’t be unthinkable for lucrative reforms to be considered for other taxes, particularly IHT and capital gains tax, given the amount they raise for the Treasury on an annual basis.

‘If the Chancellor launches a sledgehammer to the tax system in an Autumn Budget and explicitly increases IHT charges then many more people will be affected – and some may need to go as far as selling family homes to pay their IHT bills.’

Cutting your IHT bill: Three tips from Tilney’s Ian Dyall

Pass on your pension

Pensions can play a big role when it comes to estate planning, as they aren’t included when your inheritance tax bill is calculated. 

If you can afford to leave your pension untouched while using other assets to fund your retirement, you could pass your pension on tax-efficiently while gradually reducing the size of your taxable estate.

If you die before you are 75, the person who inherits your pension can make withdrawals without paying any tax. If you die after age 75, the beneficiary will pay tax on withdrawals at their marginal income tax rate. However, access to these pension features is not available on many older pensions.

Make gifts in trusts

Trusts make it possible to give gifts to others while keeping control over the money. Usually when you set up a trust you can choose who receives the gift, when they receive it and what they can use it for. Many people make gifts in trust when the beneficiary is:

  • Too young or inexperienced to look after the money
  • In ill health or has certain disabilities 
  • Going through divorce or bankruptcy proceedings 

You can also use certain trusts to make a gift while still benefiting from the money. For example, you could give away an investment while keeping any income it pays or keep an investment while giving away its growth.

Use tax-efficient investments to benefit from business relief

Under business relief rules, you may be able to reduce the value of your inheritance tax bill by owning or investing in a business. You can claim business relief on:

  • A business or interest in a business (including a sole trade and partnership)
  • Land, buildings or machinery owned by a partner or controlling shareholder of a business and used by the business
  • Unquoted shares, such as those listed on the Alternative Investment Market (AIM) or Enterprise Investment Scheme companies.

You will need to own the assets for at least two years before you can claim business relief on them. 

Some assets become completely free from inheritance tax under these rules, whereas others only receive 50 per cent relief – and there are also several exceptions. In addition, investing in smaller companies can be higher risk. 

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

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Crackdown on second home and holiday let tax dodgers

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The Government is cracking down on second home owners who claim their properties are holiday lets for tax purposes.

Communities secretary Michael Gove is set to close a tax loophole which has allowed second home owners to avoid thousands of pounds per year in taxes, without proving that the property was ever rented out. 

The new rules will target those who register their holiday lets as small businesses, meaning they are eligible for business rates instead of council tax.

But the majority pay no business rates at all under the system, because they have ‘rateable values’ of under £12,000 based on the property’s rents, size and usage. 

Crackdown: Those registering second homes as businesses could fall foul of new rules

Crackdown: Those registering second homes as businesses could fall foul of new rules

A second home can be registered as a small business if it will be available as a holiday let for 140 days or more in the coming year.  

However, there is currently no requirement to provide evidence that a property has actually been let out, leaving the system open to abuse. 

This has caused anger in areas that have lots of second homes, such as Devon, Cornwall and the Lake District, as some locals believe property owners are not paying their fair share towards council services.

According to Ray Boulger of mortgage broker John Charcol: ‘Some 97 per cent of the 65,000 holiday let properties in England have rateable values of under £12,000, which means they qualify for small business rates relief and pay no rates at all.’

The new rules aim to change this by ensuring that only those properties which are actually rented out for 70 days per year, and available to rent for 140 days, get the tax break. 

Kurt Jansen, director of the Tourism Alliance said: ‘It makes a very important distinction between commercial self-catering businesses that provide revenue and employment for local communities, and holiday homes which lie vacant for most of the year.’

This is Money explains how the new system will work, and how second home and holiday let owners can make sure they are following the rules. 

Locals in UK holiday spots have expressed anger at second home owners, who they say are not contributing their fair share to the community and services via council tax payments

Locals in UK holiday spots have expressed anger at second home owners, who they say are not contributing their fair share to the community and services via council tax payments

What do the new rules say? 

The rules are based on the amount of days a property is rented out in each tax year. 

To qualify for business rates instead of council tax, the new legislation will require second home owners to prove their property will be available for ‘commercial short term, self-catering rentals’ for at least 140 days in the coming year. 

They will also need to prove that, in the previous year, it was available for letting for 140 days and actually rented out for at least 70 days. 

This is designed to prevent second home owners from registering their properties as small businesses, and then not actually renting them out.  

‘We will not stand by and allow people in privileged positions to abuse the system by unfairly claiming tax relief and leaving local people counting the cost,’ said Gove when he announced the policy. 

‘The action we are taking will create a fairer system, ensuring that second homeowners are contributing their share to the local services they benefit from.’

Anger among locals has increased since the start of the pandemic, as wealthy people snapped up UK holiday lets when travelling abroad was not allowed. 

Exempt: As they are assessed differently to bricks and mortar properties, caravans being used as holiday lets will not come under the government's new second home tax rules

Exempt: As they are assessed differently to bricks and mortar properties, caravans being used as holiday lets will not come under the government’s new second home tax rules

What counts as a holiday let?  

The business rates rules for holiday lets only apply to buildings, or self-contained parts of buildings, that would otherwise be assessed for council tax. 

Caravans will not generally be subject to the rules, as they are usually assessed for business rates under a different system to bricks and mortar buildings. 

When it comes to counting the days that a property was rented out, the government says that only days where the property was occupied at the end of the day should be included.

So if a property was let out from Friday evening to Sunday morning, it would have been let for two days for the purposes of meeting the holiday lets criteria.

Is this definitely going ahead, and when will the rules come into force?

The government has concluded its consultation on the new policy, which started before the pandemic in 2018. It plans to implement the changes from 1 April 2023. 

However, the legislation needed to do so has not yet been passed in parliament.

While the government has made clear its intention to enshrine the new rules in law, they are not set in stone just yet. 

How much would I pay under each system?

Small businesses can find their rateable value on the Government website. 

Those with a rateable value of below £12,000 are not eligible for business rates, while those with a value of up to £15,000 pay special tapered rates. 

For those with a rateable value of between £15,000 and £51,000, they will need to multiply that value by 49.9p to find out their rateable value. They can then subtract any discounts that they may be entitled to, which the government details here

Those with a rateable value of more than £51,000 will follow the same calculation, but with a higher multiple of 51.2p.  

As for council tax, second homes are charged at the same rate as main residences. 

Individual councils may decide to give a discount for second homes, or on homes that have been empty for two years. Owners should contact their council to find out if this is available.

Under the new rules, the government has said there will be no rate or council tax discount for those with lots of properties.  

What if I have a new holiday let with no proof of lettings for last year?

Those acquiring a new holiday let and wanting to register for business rates will not be able to prove that their property was available to let for 140 days and actually let for 70 days in the past year, as required by the new rules. 

Until the owner can provide that proof, they will be subject to council tax – meaning most will need to pay that for at least the first year of their ownership. 

After that, they can ask the Valuation Office Agency (VOA) for a business rates assessment. 

This is the government body that handles everything to do with business rates, and it will be responsible for policing the new rules once they come in to force. 

Don't lie low: Property owners who don't think their property meets the new letting rules, but who are paying business rates, are advised to inform the VOA as soon as possible

Don’t lie low: Property owners who don’t think their property meets the new letting rules, but who are paying business rates, are advised to inform the VOA as soon as possible

I don’t think my property will meet the criteria for last year. What should I do?

Some holiday let or second home owners will not be able to prove that their property was available to let for 140 days and actually let for 70 days in the past year. 

The government says people in this position ‘should notify the VOA as soon as possible, so that their property can be assessed as domestic and revert accordingly to (or be given) a council tax valuation.’ 

It adds that failure to do so could result in a large, backdated council tax bill.

How will it be policed?

When seeking a new business rates valuation after April 2023, second home owners will need to provide evidence that their property was let or available to let for the required periods.  

The government has said will communicate the exact method for collecting evidence before the new rules come into effect.

However, this is expected to include things like the property being listed on rental websites, and evidence of payments from guests.  

‘Evidence of lettings will be required, such as at least one website or brochure used to advertise the property and letting details and receipts,’ says Boulger. 

Those already paying business rates on their holiday let or second home, and who meet the letting requirements, do not need to submit anything. 

However, they should ensure that they have evidence of the last year’s lettings by April 2023, as the VOA may ask for them at any time. 

‘The only impact the new rules will have on genuine holiday let properties might be the need to provide the evidence outlined above, but this information should be readily available for the owner’s tax return,’ says Boulger. 

What if the property is used by family and friends?

Those who regularly allow family and friends to use their properties for free could find they are no longer eligible to register as a small business under the new rules. 

The government says lettings counted in the 70-day period must be on a ‘commercial basis’ at ‘market rates’ and that ‘lettings to friends or relatives at zero or nominal rents will not be covered.’ 

No more mates rates? Money will need to change hands when the property is let, or it will not be counted as a holiday letting under the government's new 70-day rule

No more mates rates? Money will need to change hands when the property is let, or it will not be counted as a holiday letting under the government’s new 70-day rule

Of course, if there are 70 days of commercial lettings on top of discounted ones to friends and family, this will not be a problem.  

Boulger says owners should still be able to rent to people they know at a small discount as part of the 70 days, for example if they are deducting the fees that a listings website would normally charge for a letting via their platform. 

‘It should not prevent the owner offering a reasonable discount to family on friends if, for example, they can avoid the normal commission otherwise payable to the sites advertising their property,’ he says.    

What are the rules outside of England?

Wales has already had similar rules for holiday lets in place since 2010, and the new legislation will bring England in line with those.

The Scottish government is also set to introduce a requirement that holiday lets are rented for 70 days and available for 140 days in a given year, following a consultation called the Barclay Review. 

These rules are set to come into force from 1 April 2022. 

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

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Man admits to abduction of four-year-old Australian Cleo Smith

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A man has pleaded guilty to abducting a four-year-old girl from her family’s camping tent on Australia’s west coast last year.

Police found the girl, Cleo Smith, alone in a house in Carnavon, a town of 5,000 people, 18 days after she went missing last October.

Terence Darrell Kelly (36) admitted to the abduction during a brief court appearance in Carnarvon on Monday in a video link from a Perth prison, 900 km to the south.

He faces a potential sentence of up to 20 years in prison on a conviction of forcibly taking a child aged under 16. He will next appear in a Western Australian state District Court in Perth on March 20.

Kelly has not entered a plea to other criminal charges he faces, including assaulting a public officer. Those charges have been adjourned to a later date. – AP

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Peter Todd, Founder, Portus Retail

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Peter founded Portus Retail in 2016 with the aim of creating places that perform as retail destinations for shoppers with shopping environments that are adaptable to retailers in a rapidly changing market.

What are the main changes in the physical retail sector that you expect to define the market in the post-covid world?

The number of store closures and the consolidation of retail, F&B and leisure outlets are reshaping the look, feel and content of city centres and shopping centres. This is driven by more than store closure; it also reflects changes in consumer behaviour that require the physical retail sector to reinvent itself to remain relevant. The recently announced plans for revised and substantially reduced retail content to the development plans for Croydon Town Centre are an example of this. Town centre retail and shopping centres need to be or become mixed-use developments offering facilities that consumers want and will visit – offices, cultural attractions (more leisure), education facilities, community uses such as medical centres are all examples of the content that owners of retail locations will need to repurpose their centres to accommodate. In addition to this, the changing role of the physical store is a factor that will reshape centres; online sales growth is a permanent shift in the market and Covid has accelerated that. Physical stores need to offer customers both convenience and experience, this will mean store sizes will change and mainly reduce in size as they serve a role as both a point of sale, a showroom and in many instances click and collect for the fulfilment of an online sale once the customer has browsed the products! Smaller stock rooms, smaller store sizes will all require the owner and retailer to work on physical reconfiguration, potentially releasing space for alternative uses such as those mentioned. 

 

What have been the most significant changes to consumer behaviour that you have witnessed since the pandemic and Freedom Day? What is the key to addressing them?

There has been a strong customer return to physical shopping in recent weeks since the lifting of many of the Covid restrictions. This has been confirmed by the results of the major online retailers where the growth has stopped. In today’s FT Walmart reported disappointing online sales growth in Q2 and on the same day a surge in physical store sales from a strong back to school campaign in the US. There is a clear divide in the level of caution of consumers based largely on age, customers below 45 seem more confident in visiting physical retail locations, we have observed this at one of our larger centres – Docks Bruxsel in Belgium. We have also seen a very strong return to shopping with our footfall being substantially higher than during the same period of 2019, pre-pandemic. Unsurprisingly there has been a shift in consumption with more customers focussed on fashion, F&B and leisure than during the lockdowns as they purchase the items and experiences that were less available to them and less on home goods and electronics which had a boom during the pandemic. In my view, this increase in footfall for Docks is also because of consumer trends. CACI has recently released a consumer survey confirming post-pandemic trends, this identified an increased desire to support local retail centres, to visit retail destinations that were open-air, environmentally positive and offered multiple attractions with mixed-use, not just retail as well as an experience. Destination leisure, offices, event space significant F&B in an environmentally friendly environment are all characteristics of Docks. In the CACI report, they also confirmed the clear divide in intent to visit physical retail locations among younger customers and a shift favouring local high streets, shopping centres and away from large city centres.

 

Are there any concerns regarding managing future covid waves? 

Most retailers and owners have learned a great deal during the pandemic about how to operate and engage with customers to reassure them with healthy shopping environments and social distancing measures being well defined. That should put the shopping centre market in a good position to cope with further waves. The risk remains more to be the unknown, stringent lockdowns and enforced closures impact cash flow and that is the greatest remaining risk along with the challenge of repositioning retail environments as mentioned above. Additionally, there are locations that will not be able to carry out the repositioning either physically or because of economic viability. In my opinion, the economic costs and challenges of repositioning will be the greatest risk and challenge to retail centres.

 

What role do you think temporary retail solutions will play during the recovery?

Embracing temporary solutions will be essential to success for the owners of retail centres. One of the most exciting aspects of the post-pandemic market will be the emergence of new retail and leisure concepts and formats. Temporary lettings, pop-ups, trials of new concepts and those owners who can accommodate and incubate the new formats with temporary retail solutions will in my view be the more successful owners. We are seeking to keep available floor space in a “white box” format for exactly this as the new formats emerge and develop.

 

What does the future hold for Portus Retail?

I am very optimistic for the future, there shall be an unprecedented need for repositioning of retail real estate; this will at times be painful, difficult, and expensive. As I have mentioned not all centres will have a viable future. We have already seen some of the emerging consumer surveys and corporate results confirm a return to growth in physical store retailing. I am therefore positive about the prospects for the sector, provided that these is locations and centres that are successful in the repositioning mentioned. This will be a huge economic and management challenge with the need for very hands-on management of the retail environments. The changes to come will present an opportunity for owners and investors, provided they are focussed upon the key consumer trends in the sector and prepared to work extremely hard. In conclusion, I expect Portus Retail to be extremely busy working upon repositioning of retail environments.

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