England and Wales’ inheritance tax ‘hotspots’ are almost all in London and the south-east of England, according to an article in Which.

A new inheritance tax threshold was introduced in 2017, allowing individuals an extra £100,000 to pass on to their beneficiaries if their estates included the family home. In 2020, the sum rose to £175,000, which meant an individual could bequeath £500,000 in total while married couples and those in civil partnerships were allowed up to £1 million.

In 2017-18, only 3.9 percent of estates paid inheritance tax—the first time that inheritance tax revenues had fallen in eight years.

Impact of average property prices

Changes to the way the tax is applied affect some parts of the two countries more than others, according to the Which article. Average property prices in an area have a big impact, with the figures for 2017-18 showing that 53 percent of inheritance tax came from London and the south east.

The government had introduced the new threshold because of steeply rising property prices. It only applies to direct descendants—children, grandchildren and stepchildren. Before the new residence band was introduced, figures from the Land Registry show than more than one in four properties in England Wales were being sold for more than £325,000.

But the introduction of the added allowance in 2017 dropped the number of houses sold above the combined allowance to 17 percent, benefiting more than 20,000 people in the first year and saving a total of £3.1 billion.

Number of homes sold

The Land Registry also shows that the number of homes sold above the combined allowance in 2019 was just 13 percent.

The inheritance tax hotspots are centred around London and the surrounding counties. Nine out of ten of the local authorities with the highest proportion of £500,000 properties are in London. The top authorities are Kensington and Chelsea, where 85 percent of properties sell for above £500k, with 58 percent of them selling for more than £1 million.

Of the top 100 local authorities with the highest percentage of properties selling for more than £500k, only two are in the north (Harrogate and Trafford), revealing a distinct north south divide.

In the next tax year, the residence nil-rate band will increase again but only in line with the consumer price index. Forecasts from HMRC show that the numbers paying inheritance tax is expected to increase gradually because property prices are expected to rise faster than inflation.

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