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Where people live has a large influence on how likely they are to pay inheritance tax (IHT), with latest HMRC figures (for 2017/18) showing that 53 per cent of inheritance tax revenue for England and Wales came from London and the South East.
Meanwhile, according to research collated by consumer organisation Which?, almost nine out of 10 properties sold in England and Wales last year fell outside the threshold for IHT.
Following changes to inheritance tax allowance introduced in 2017, people were allowed to pass on an extra £100,000 if their estate included the family home. This year, that allowance (the residence nil rate band), rose to £175,000, allowing an individual to pass on a total of £500,000, and married couples and civil partnerships up to £1m.
Under current IHT laws, when someone dies, anything they leave to their spouse or civil partner is free from tax.
When leaving something to anyone else, everyone has access to a ‘nil rate band’ (NRB) which has been set at £325,000 since 2009. This can be used when bequeathing any asset to anyone. However, in response to rising property prices, the government introduced a second band in the 2017-18 tax year, the residence nil-rate band, which gave people an additional £100,000 allowance when passing on their main residence.
But this only applies to direct descendants, such as children, grandchildren or stepchildren.
The residence nil-rate band has been rising by £25,000 each year since, until it reached £175,000 in April 2020. This means that an individual can now pass on a property worth up to £500,000 tax-free. As people can transfer unused IHT allowances to their spouse or civil partner, married couples and civil partnerships can now pass on up to £1m free of tax.
Before the new residence band was introduced, data from the Land Registry showed that more than one in four properties in England and Wales were being sold above the threshold of £325,000. The addition of the extra £100,000 allowance in 2017/18 saw this figure drop to 17 per cent.
Which? quotes Land Registry data that shows the number of homes sold above the combined bands fell to 13 per cent in 2019, with fewer than 3 per cent of properties sold in 2019/20 changing hands for more than £950,000.
The London borough of Kensington and Chelsea tops the list of authorities with the most properties selling for more than £500,000 (with a figure of 85 per cent).
With 58 per cent of properties in the borough selling for more than £1m, Kensington and Chelsea generates twice as much IHT revenue as the whole of the North East of England.