UK Boomers’ Homes at Risk in Tax Time Bomb

The United Kingdom is on the verge of an unprecedented wealth transfer, set to rattle the foundations of ordinary families. Experts are sounding the alarm that many baby boomer homes might soon hit the market in rushed “fire sales” as the next generation grapples with daunting inheritance tax (IHT) bills.

Born from the post-World War II population boom between 1946 and 1964, baby boomers have been the cornerstone of the UK’s wealth accumulation. Notably characterised by high rates of home ownership and savings, this generation is now beginning to pass away, triggering significant financial activity. Over £1.2 trillion is expected to be handed down over the coming decades, with estate agent Savills noting that over 65s hold about 43% of UK housing wealth.

The IHT Challenge

Introduced in 1694, IHT was originally meant to fund military campaigns but has evolved into a 40% tax on estates exceeding certain thresholds. The current allowance sits at £325,000, with an additional £175,000 if property is passed to direct descendants, effectively allowing some estates to reach £1 million before taxes kick in. Despite this, neither threshold has seen an increase since 2020 and are frozen until at least 2028. This static threshold, combined with soaring property values, has created a precarious situation where more families find themselves liable for substantial IHT bills.

Last year alone, families paid a record £7.5 billion in IHT, a figure that’s expected to increase by another £2 billion by 2030. This burden often hits hardest just as families are dealing with the loss of a loved one, with IHT due within six months of death, often before probate is even granted.

Forced Sales and Financial Hardship

With many inheritors finding themselves asset-rich but cash-poor, the pressure to cover IHT bills leads to quick property sales and burdensome loans. Harry Bell from Charles Stanley highlights the stress and financial strain placed on executors, typically the children of the deceased, who are forced into selling family assets under pressure.

The result could be a destabilisation of property markets similar to the crashes seen during the 2008 financial crisis. Chris Rudden from Moneyfarm points out the risk of a downward spiral in property values, affecting even those not directly involved in these forced sales.

The Misleading Safety of Allowances

While a potential £1 million allowance might seem sufficient, it quickly proves inadequate, particularly for those unmarried or without direct descendants, where the allowance drops back to £325,000. With average UK house prices having risen 22% since the last IHT threshold increase in 2020, and even higher in regions like London and the South East, many estates easily breach the IHT threshold.

A Call to Action

Advisors are now urging families to engage in proactive estate planning and open conversations about inheritance to mitigate these IHT liabilities. There are legal avenues to reduce or avoid these taxes, but awareness and understanding are often lacking.

An Urgent Need for Policy Review

The situation paints a grim picture of the future for many UK families, potentially leading to a significant loss of property and financial security due to a tax structure that has not kept pace with economic realities. This crisis calls for a critical review and adjustment of inheritance tax policies to better reflect the current economic landscape and provide relief to those caught in this impending tax snare.