The number of UK families paying inheritance tax is at a 35-year high as surging house prices push the value of family assets above a static tax threshold.
Almost three times as many estates are expected to face “death duties” this year compared with six years ago. The Office for Budget Responsibility, the government’s fiscal watchdog, has estimated that 40,100 bereaved families will face tax on their inheritance in the current tax year, rising to 45,100 in 2016-17.
The growth will be stemmed, however, when an additional allowance for family homes takes effect in April 2017.
This is the largest number of families paying IHT in any year since 1979-80, Margaret Thatcher’s first as prime minister, when a tax of up to 75 per cent was levied on inherited assets above £25,000.
George Bull, senior tax partner at the accountants RSM, said that since David Cameron became prime minister, “the tax has brought more and more people into its clutches”. This is despite Mr Cameron saying before the last election that IHT should only apply to the “very wealthy”.
Whereas 2.6 per cent of all deaths incurred IHT liabilities in 2009-10, the proportion has risen sharply to an estimated 7.1 per cent in 2015-16. The OBR projects it will affect 8 per cent of estates in 2016-17.
House price rises have magnified the value of many estates, especially in London where average prices rose 64 per cent to £531,000 in the six years to October 2015, according to the Office for National Statistics.
Mr Bull said that with the inflation of family assets, the widening scope of IHT could be largely attributed to the frozen tax-free allowance, or “nil-rate band”, that each person has. Having consistently increased each year under successive governments since the early 1980s, the nil-rate band has remained at £325,000 since 2009.
Exchequer revenues from IHT, which is levied at a rate of 40 per cent on assets above this nil-rate band, have risen year-on-year since 2009-10 and are expected to hit £4.4bn in 2015-16, surpassing their pre-crisis peak.
“Over the past five years, the government’s clear objective appears to have been to raise more money from inheritance tax,” said Nimesh Shah, a partner at accountants Blick Rothenberg.
Mr Shah said that on top of freezing the nil-rate band, the government has cut reliefs that allowed some families to cut their IHT bills. It is no longer allowed, he said, to deduct debts such as business loans from estates before IHT is taken, for example. From April 2017, IHT will also become payable on homes owned by non-domiciled residents.
Last summer, however, the chancellor announced a new relief designed to take thousands of families out of the IHT net each year. The so-called main residence nil-rate band, which applies when a family home is inherited on death, will be gradually introduced between 2017 and 2020, rising from an initial £100,000 to £175,000 per person. Like the existing allowance, it will be transferable between spouses, allowing couples to jointly pass on a home worth up to £1m tax-free to their heirs from April 2020.
The OBR estimates that when the allowance is introduced on top of the nil-rate band in 2017-18, the number of deaths subject to IHT will fall by one-third to 30,300, equivalent to 5.4 per cent of the total. Although the fiscal watchdog projects this will rise to 6 per cent by 2020-21, before the reforms it had estimated it would affect 11 per cent of estates by then.
Despite reducing the numbers affected by IHT, the introduction of the family home allowance will not cut the overall amount of tax raised on estates. The OBR expects exchequer receipts to gradually grow to £5.6bn by 2020-21.
Mr Bull said revenue growth from a smaller tax base reflected how the wealthiest families would continue to pay a larger share of overall IHT. The percentage paid by estates worth more than £1m rose from 49 per cent in 2006-07 to 70 per cent in 2012-13, according to HM Revenue & Customs figures.
“It is curious, as inheritance tax is so often wrongly referred to ‘optional’ for the wealthiest,” said Mr Bull.
Get alerts on UK tax when a new story is published