Average home to fall into inheritance tax net within a decade

Telegraph

15-05-2025

Soaring property prices will drag the average UK home into the inheritance tax net by 2035, analysis suggests.
Rising property prices combined with frozen inheritance tax thresholds will land more bereaved families with tax bills in the coming years.
Between April 2024 and March, the Treasury raked in a record £8.2bn in death duties – £750m more than the year before.
By 2035, the average UK property value will surpass the inheritance tax-free threshold of £325,000, analysis of Land Registry data by investment platform Wealthify found.
The average house price in February stood at £268,319, nearly double what it was in February 2005, when the average price was £138,626, according to the Land Registry.
The Office for Budget Responsibility expects that under Labour, 9.7pc of estates will pay inheritance tax by the end of the decade, up from 4pc currently. The death levy is predicted to raise £14bn a year by 2030.
Inheritance tax is paid at 40pc of anything left over the £325,000 threshold, although there are other allowances that can be claimed.
The tax-free allowance, known as the nil-rate band, increases by £175,000 when a main residence is left to direct descendents, such as children or grandchildren.
The £325,000 allowance is frozen until 2030 after Ms Reeves extended a tax band freeze introduced by the former Conservative chancellor, Jeremy Hunt, in 2022. The nil-rate band, which was set in 2009, would be £510,921 today if it had risen with inflation.
Failing to increase both the main tax-free allowance and the additional residency would cost a married couple with £1m in inheritable assets an extra £233,560 in tax, analysis by investment platform AJ Bell found.
Charlene Young, pensions and savings expert at AJ Bell, said: 'Frozen tax thresholds punish taxpayers by stealth. When asset prices rise but thresholds fail to track inflation, the result is higher tax bills.
'Astonishingly, the main inheritance tax free threshold won't have changed in over two decades by the time the freeze is lifted in 2030.'
It comes after Rachel Reeves announced in her inaugural Budget last October that pensions would become subject to the death levy from April 2027.
Ms Young said: 'The impact of the frozen bands will be turbo-charged if the taxman is also allowed to take a slice of unused pensions on death.
'If the changes are implemented as originally proposed for deaths from April 2027, the Exchequer might well overshoot its own impact assessment on the impact of the two-year extension to the inheritance tax band freeze by the time it comes to an end.'
Parents told The Telegraph that they were planning to give larger sums to their children before they die, in order to help with house deposits.
Any gift made more than seven years before death is exempt from inheritance tax automatically. Taxpayers also have a £3,000 annual gift allowance – which is designed to cover events including birthdays and religious holidays.
Simon Holland, of Wealthify, said: 'Our research shows that four in five parents are becoming increasingly concerned with the amount of inheritance tax bereaved families are paying, driving a growing trend in people looking at how to pass on money to their loved ones in a tax-efficient way.
'If you are relatively young, healthy, and are financially able to do so, you might want to consider leaving your children a chunk of inheritance while you're still here.'
But those looking to reduce a tax bill must be careful to record any gifts. HM Revenue and Customs (HMRC) launched 3,961 investigations into underpaid inheritance tax in the 12 months to April 5, an increase of 31pc on the previous tax year.
The tax authority has opened nearly 10,000 investigations into families in the past three years. Of those, 2,606 are ongoing, data from a Freedom of Information request revealed.
A Treasury spokesman said: 'This assumes inheritance tax policy in a decade's time. Decisions on this tax policy will be made then.'