The UK has been witnessing a massive rise in house prices since the start of the pandemic – with values increasing by 8% over the last year.
And Jacquetta Straker, IFA at Lycetts Financial Services, has warned that soaring house price inflation could risk life cover shortfalls for inheritance tax (IHT) bills.
With property values continuing to hit record highs, Straker is urging homeowners to review their life insurance policies to ensure their cover is adequate.
In the tax year 2021/22, IHT is set at 40% on the value of estates over the nil-rate band or personal allowance. Where estates are passed on to direct descendants, the threshold can be up to £500,000 ($697,700, €586,387), with two tax-free allowances applying – the basic IHT allowance and residence nil-rate band.
If at least 10 % of an estate is being left to charity, the IHT is reduced to 36%.
Straker said: “Despite the stamp duty holiday ending, and rates returning to pre-covid levels, house prices continue to rise, meaning IHT liabilities are increasing, and more estates are being dragged above the tax-free inheritance threshold of £325,000.
“The situation has been exacerbated by the government’s decision to freeze the nil-rate band threshold until 2026. Latest HM Revenue and Customs (HMRC) figures show a six per cent increase in the average IHT bill, which now stands at almost £210,000.
“Whole of life insurance policies offer a good solution to offsetting the cost of this unwelcome financial burden, by covering the full cost of the inheritance tax bill. As the policies represent long-term purchases, however, they will often be taken out and then forgotten about, making it essential that they’re reviewed to ensure that the sums assured are adequate and that the trust and trustees are up-to-date.
“In some cases, sums assured are index-linked to cover the increases in the value of estates, but these will often be capped and may be insufficient. Although people may wish to leave their assets to their children, without proper planning the biggest beneficiary of their estate could in some cases be HMRC.”