Inheritance Tax Fails To Match House Price Inflation

The price of an average home in a tenth of towns in the UK is now higher than the inheritance tax (IHT) threshold.

Inheritance Tax is paid on the 'estate' of people who pass away. The estate refers to everything owned at the time of death, including property, possessions, money and investments, minus any debts.

The current IHT threshold is set at £285,000, meaning that anyone inheriting a home worth more than this must pay a 40 per cent charge on the excess above this threshold.

The bank has released the results of its survey of the property market which show that 48 out of 482 towns in England have average house prices above the IHT threshold and inheritance tax and is calling for a new threshold of £430,000, in line with house price inflation.

The chancellor has announced plans to raise the IHT threshold to £325,000 over the next two years, though average house prices are expected to rise significantly over the same period.

IHT is worth around £3 billion a year in taxes, with increases in the exemption threshold traditionally linked to the retail price index (RPI) rather than property increases.

An increasing number of households in Britain are becoming concerned about inheritance tax and many are forced to sell properties that they would rather keep in the family to pay death duties. Paying inheritance tax is the responsibility of the person nominated to handle the affairs of the deceased person and there are potentially stiff penalties if it is not paid.

The Conservative Party is expected to consider recommendations to scrap inheritance tax on primary family homes, according to the Observer newspaper.

A tax reform policy commission, set up by shadow chancellor George Osbourne, is expected to propose a tax only on second homes.

Almost 20 per cent of towns have an average house price within 20 per cent of the threshold and Halifax predicts that the number of places in England with average homes costing more than IHT threshold will reach 20 per cent by 2010.

More estates in Britain worth less than £500,000 are now paying IHT, accounting for 71 per cent of all estates incurring the tax.

Exemptions to inheritance tax include estates passing to a husband, wife or civil partner, gifts awarded more than seven years before death and certain other gifts up to £5,000, though transfers of assets into most trusts and companies are subject to an immediate IHT charge.

The IHT threshold has risen from £242,000 to £285,000 over the past five years, with those in the south of England hit hardest. House prices have soared by around 179 per cent over the past decade, far in excess of the 85 per cent rise in the IHT threshold over the same period.

Halifax economist, Tim Crawford, said: "We call on the government to raise the inheritance tax threshold to £430,000. Doing so would allow for the significant increase in property prices over the past decade. It would also ensure that many middle income home owners avoid a tax which was never intended that they pay in the first instance.

Recent reports have suggested that more and more Britons are spending their children's inheritance in retirement. A study by propertyfinder.com discovered that just 29 per cent of pensioners rated providing for heirs as very important, with many choosing to release equity from their homes to fund their twilight years.

There are ways of getting around paying large sums in inheritance tax and a growing number of financial advisors are profiting from Britons' reluctance to play death duties. The number of estates liable for the tax is predicted to rise as high as 3.6 million by 2009.