The UK government’s record inheritance tax haul reveals how more British families are being caught out – including expatriates – despite a new property allowance. 

Last year, British taxpayers paid more UK inheritance tax than ever. Totalling £5.2 billion over the 2017/18 tax year and 8% more than the year before, this continues an eight-year upward trend. 

Unusually, this is not the result of government measures to catch more taxpayers by widening the inheritance tax net. Rather, the opposite applies; a new property relief enabled couples to pass on a main home worth up to £850,000 tax-free last year and rates have remained frozen at 40%. 

So why are revenues increasing?

A simple explanation would normally be a higher death rate, especially among wealthier people.

However, the reality is that soaring asset values – especially property – have pushed more people over the threshold for inheritance tax liability, despite the extra relief. As house prices have continued to rise, so has the number of estates falling within the inheritance tax net, along with the amount of tax payable. 

This helps explain why inheritance tax revenue has more than doubled over seven years. Back in recession-hit Britain in 2009/10, vastly lower property values saw the Treasury receive £2.4 billion in inheritance taxes, with only one in ten properties sold over £325,000. Fast forward to 2015 and one in four houses breached that threshold. Moreover, while property values have consistently outpaced inflation, the standard inheritance tax relief – frozen at £325,000 since 2009/10 and fixed until 2020/21 – has not even kept up with it.

Today, with average house prices over 30% higher than 2009, it is not surprising that an increasing number of families are being drawn into the net.  

What about the main home allowance? 

In April 2017, the new ‘residence nil-rate band’ added an extra £100,000 tax-free allowance for main homes – including overseas homes for UK domiciles – on top of the standard £325,000 inheritance tax threshold. This increased by £25,000 on 6th April 2018 and will rise each year by the same amount until April 2020 (from which point it tracks annual inflation). Unused relief is transferable to a spouse, so couples can currently pass on a family home worth up to £900,000 tax-free, rising to £1 million in 2020/21. 

However, it seems the new allowance – designed to reduce the number of liable home-owners – has failed to do just that, partly by underestimating the housing market, especially in certain regions. While the average UK house price this April reached an all-time high of £305,732 according to Rightmove, this is more than double in London (£628,039) and over £400,000 in the South East.

It also appears that some taxpayers are not using the relief at all. Government figures suggest that around 22,600 estates paid inheritance tax in the last tax year, but just over 3,000 of these used the new allowance. 

This will be partly due to some of the rules that limit eligibility:

  • The full tax-free allowance currently only applies to a main residential home worth under £2 million
  • The home must be owned directly and passed on to children and grandchildren
  • Properties valued over £2 million are subject to a tapering system that whittles the allowance down to nothing when a home exceeds £2.25 million
  • Regardless of value, heirs other than direct descendants will not benefit at all
  • Second homes or investment properties do not qualify

There are also concerns that take-up may be low because some people are simply not aware that the residence nil-rate band exists or cannot understand how it works. The government itself admitted how complicated inheritance tax is when commissioning a review to simplify the system earlier this year.

With such a complex, limited framework within a still-buoyant housing market, the new relief system looks unlikely to reverse the trend for ever-increasing inheritance tax revenue. 

Liability for expatriates 

As it is where you are ‘domiciled’ that determines tax liability, not where you are resident, UK nationals living abroad often remain in the firing line for 40% inheritance taxes on worldwide assets. Find out more about domicile

UK-based assets always attract UK inheritance tax, regardless of domicile. Before 2017, this only included directly-owned UK residential properties, but now those ‘enveloped’ through a trust or corporate structure are also liable. See more about recent changes to UK domicile rules

Potentially, you could be subject to inheritance taxes in both the UK and your country of residence. It is therefore prudent to take specialist financial advice to ensure you take full advantage of all available allowances and exemptions.

As well as determining your current domicile status, an adviser with cross-border expertise can help you understand how UK inheritance tax interacts with local succession tax and recommend locally compliant investments to limit your tax exposure in both countries.

With good estate planning, you can make sure your legacy will be distributed to your chosen heirs without attracting a higher tax bill than necessary, in the UK or your country of residency.

See more about inheritance tax planning

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; individuals should seek personalised advice.