8th July 2015
The inheritance tax planning changes may not be as generous as first thought say financial planning experts as it only applies to properties.
A generous £1m is now available to families leaving a home to their children and grandchildren but otherwise the IHT threshold has actually been frozen at £325,0000 until 2020/21.
Experts say the Chancellor would have been better allowing the threshold to increase by house price inflation.
Rachael Griffin, financial planning expert at Old Mutual Wealth says this will negate the beneficial impact the £1m property exemption could have had in real terms.
“Looking at house price inflation since IHT was frozen back in 2009, prices have risen on average by 7.3% a year. If the IHT allowance for a couple, currently £650,000, rose in line with house price inflation – based on a predicted 7.3% ‘simple’ growth rate – by the time we get to 2020/21 the allowance could have be nearing the £1m mark anyway (£934,700).
“This means the enhancement introduced in today’s budget has added extra complexity to the IHT system without benefiting people in any real way. Increasing the IHT allowance in line with house price inflation would have been a more robust and cleaner solution.
“If we take the calculation back even further to when IHT was first frozen in April 2009 the increase would in fact be negative in real terms. Since April 2009 average house prices have risen by 36.6% (based on the mix adjusted rate). If IHT had kept pace with house price inflation, the £650,000 joint IHT allowance would stand at £887,900 today. Add onto this the projected rise calculated above and the IHT allowance could have been worth (£887,900 + 43.8%) £1,276,800.
“This means the £1m IHT property exemption will, over time, have a negative impact in real terms. In 2020/21 we predict it could have a negative impact in real terms of £276,800.”
Data source: ONS – House Price Index (HPI) – published 19 May 2015. Data based on the mix adjusted average house prices. Mix adjusted house price in 2009 was £194,000, in 2014 was £265,000. Average growth between these points was 36.6% (7.3% per year). Forecast prediction based on 7.3% simple growth per year for 6 years = 43.8%.