FROZEN IHT THRESHOLD DRAGS MAJORITY OF LONDON HOMEOWNERS TOWARDS TAX LIABILITY

RISING LONDON PROPERTY PRICES DRAG MORE HOUSEHOLDS INTO INHERITANCE TAX NET

Surging property values in the capital are pushing a growing number of families into the inheritance tax net, with the majority of homes purchased in Greater London now exceeding the government’s long-standing tax threshold.

New analysis of HM Land Registry data by law firms Shakespeare Martineau and Lime Solicitors shows that homes bought in London in 2025 were more than twice as likely to expose households to inheritance tax (IHT) compared with purchases made in 2009.

The research reveals that in 2009 just 35% of residential properties bought in the capital — 26,662 out of 76,194 transactions — were valued at or above the £325,000 inheritance tax threshold. By 2025 that figure had risen dramatically to 84%, equivalent to 61,485 of 73,036 purchases.

The sharp increase reflects nearly two decades of rising house prices combined with a frozen tax allowance. The £325,000 nil-rate band, which determines the point at which inheritance tax begins to apply, has remained unchanged since 2009 and is currently scheduled to remain frozen until at least 2031.

Tax specialists warn that the combination of house price inflation and static tax thresholds is steadily widening the number of households exposed to inheritance tax liabilities.

Julia Rosenbloom, tax partner and chartered tax adviser at Shakespeare Martineau, said the tax system had gradually shifted from targeting only the wealthiest estates to affecting a much broader section of society.

“When modern inheritance tax – originally introduced as estate duty in the late-1800s – was created, it was designed to apply only to the very wealthy.

“However, with the tax-free allowance frozen for almost two decades, rising property prices have steadily drawn more families into the scope.

“Many people assume inheritance tax will never affect them. But as our analysis shows, a growing proportion of homes now approach or exceed the £325,000 threshold – before savings, investments or personal possessions are even considered.

“With inheritance tax charged at 40% above the threshold, families can be left facing a substantial and unexpected bill at an already difficult time.”

Inheritance tax applies when an estate — including property, savings and other assets — exceeds £325,000. The standard rate is 40% on the value above that threshold.

Government revenues from inheritance tax have risen sharply in recent years. HMRC collected a record £8.25 billion in inheritance tax receipts during the 2024/25 financial year, up from £7.5 billion in the previous year.

Some families benefit from an additional allowance when a main residence is passed to direct descendants. The residence nil-rate band can add up to £175,000 to the tax-free allowance, potentially increasing the overall threshold to £500,000.

Yet even that higher threshold is increasingly being surpassed by London property values. The research found that homes purchased for £500,000 or more accounted for 52% of transactions in Greater London in 2025, compared with just 15% in 2009.

Tax professionals also warn that upcoming policy changes could further widen exposure to inheritance tax for some households.

Julia Rosenbloom highlighted reforms affecting pensions, as well as changes to reliefs for business owners and farmers.

“From 6 April 2027, most unused pension funds and death benefits will be included within an individual’s estate for inheritance tax purposes and taxed at up to 40% – ending the long-standing exclusion of pensions from the IHT net.

“Additionally, certain reliefs – agricultural property relief and business property relief – can reduce the taxable value of qualifying assets by up to 100%.

“From 6 April 2026, the 100% relief will be capped at £2.5 million of combined agricultural and business assets, with any excess receiving only 50% relief, though it was originally expected to be capped at only £1 million.

“Anyone with business or agricultural assets should take steps to ensure they qualify for these valuable reliefs, which have strict conditions. Individuals with particularly valuable businesses or farms may need to consider additional planning to manage the inheritance tax liabilities that could otherwise arise on their death.

“Combined with rising property values and a frozen nil-rate band, these changes could substantially increase exposure for many households.

“There are legitimate and effective steps people can take to mitigate inheritance tax and ensure more wealth passes to loved ones rather than HMRC but the rules are complex and mistakes can be costly.

“While there is a wide range of planning options available, each comes with its own technical requirements. Taking tailored legal and tax advice is essential to avoid inadvertently triggering additional liabilities.”

As estate values grow and inheritance tax planning becomes more complex, legal specialists expect disputes between beneficiaries to become increasingly common.

Alistair Spencer, inheritance disputes legal director at Lime Solicitors, said higher-value estates and tax planning decisions could heighten tensions among families.

“With estates growing in value, pensions becoming subject to inheritance tax and the threshold remaining static, there is simply more at stake – financially and emotionally.

“Tax-efficient decisions, such as leaving larger proportions to charity or to a spouse or civil partner, can unintentionally create tension in blended families or among dependants who expected a different outcome.

“We are likely to see more disputes as families grapple with the competing pressures of tax efficiency and fairness.

“The best protection against future disputes is careful, professional advice and open, honest communication within families. Many of the cases we see stem from a lack of clarity and unexpected provisions in a will.”

With property prices continuing to climb and tax allowances remaining fixed, experts suggest that inheritance tax — once associated primarily with the wealthiest households — is increasingly becoming a mainstream financial planning issue for London homeowners.