Pandemic house price boom fuelled record inheritance tax grab by the government

Newly released figures have revealed that the government pocketed an additional £793m in a single year from inheritance tax liabilities, largely due to the pandemic-inspired boom in property values spurred by the stamp duty holiday.

Related topics:  Finance,  Property,  inheritence
Property | Reporter
2nd November 2023
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"Although the sum of your estate isn’t solely based on the value of your bricks-and-mortar portfolio, it’s likely to be the most significantly valuable asset for most and will ultimately dictate just how much inheritance tax they could be liable for"
- Jack Gill - Final Duties

The latest analysis by probate brokers, Final Duties, looked at the latest government data on inheritance tax liability, which region was home to the highest inheritance tax bill in a single year, and how this tax grab has increased on an annual basis.

Inheritance tax is a 40% tax on the estate of those who have passed away, however, it is only applied to the amount above the threshold of £500,000 if passed to the children or grandchildren of the deceased, while no tax is owed if the estate is passed to a spouse, civil partner, charity or community amateur sports club. If the estate is passed to someone who doesn’t fall within any of these categories, tax is charged on anything above the threshold of £325,000.

£5.75bn paid in inheritance tax in a year

The latest figures show that in a single year (2020-21), the UK Government pocketed a huge £5.57bn in inheritance tax on 26,948 liable estates, equating to an average of £213,485 in tax per estate.

London saw the highest amount paid at £1.34bn, with the 4,800 liable estates taxed accounting for 18% of the national total. However, it was the South East that ranks as the inheritance tax hotspot of the UK, with 5,650 liable estates taxed in 2020-21 - accounting for 21% of the national total.

Property prices driving inheritance tax increase

While the value of a person's estate isn’t solely based on the value of their home alone, it does account for a sizable proportion of the average inheritance tax bill. A previous FOI request found that in London, bricks and mortar forms 50% of the average inheritance tax bill, while in the South East, it’s 39%.

Since the introduction of the stamp duty holiday in July 2020, the property market has boomed, with the average UK house price increasing by 23%, or £54,357.

No surprise then, that between 2019-20 and 2020-21, there has been a 17% increase in the number of estates classed as liable to be hit by inheritance tax, equating to a jump of almost 4,000 more estates.

And this increase hasn’t been driven by areas with traditionally high property values, every single region of the UK has seen a jump.

The result? In 2020-21, the Government pocketed £793m more in inheritance tax liability when compared to the previous year. While the largest percentage increase was seen across the West Midlands at 33%, it was again the South East that saw the largest monetary hike with an annual increase of £190m alone.

Managing Director of Final Duties, Jack Gill, commented: “Although the sum of your estate isn’t solely based on the value of your bricks and mortar portfolio, it’s likely to be the most significantly valuable asset for most and will ultimately dictate just how much inheritance tax they could be liable for.

"Rather convenient then, that during a global pandemic, a Government initiative to encourage homeownership has inadvertently pushed property prices to record highs. The result of this has been a sharp increase in the number of estates liable for inheritance tax, not to mention a significant increase in the sums owed.

"It’s well worth considering where you stand in this respect, as many people may not believe themselves to be wealthy as such, however, their home is likely to pull them into inheritance tax territory should they fail to properly prepare to mitigate.

"Unlike other assets such as investments, a property can’t be as easily transferred or gifted, and this is why more and more people are falling foul of the inheritance tax trap.

"While house prices may be cooling slightly, they remain close to historic highs and this is largely why the Government expects to pocket £7bn a year in inheritance tax over the next five or so years.”

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