As the inheritance tax threshold fails to keep pace with soaring house prices, a vast number of families look likely to be caught in the tax trap over the coming five years.
The number of estates that are hit by inheritance tax each year looks set to double from 21,000 in 2012 to 42,000 in 2016/17. This is far higher than the previous peak level of 34,000 estates, which was recorded in 2006/7 under the Labour Government.
The inheritance tax allowance was capped at £325,000 in April of 2011, and will stay at this level until April 2018, which means that its value is on a steady decline. In contrast, house prices across the UK are rising at a much faster level than was predicted by the Treasury. They have been tipped to increase by 25.2 per cent by the end of 2018, by which time the frozen inheritance tax allowance will have affected 176,000 estates.
Britain’s economic forecasters are said to have been taken aback by the marked rise in house prices. Earlier this year, the Office for Budget Responsibility predicted that property prices across the country would see a 1.6 per cent rise in 2014, estate agent Savills has suggested that they will see a rise of 6.5 per cent over the course of the coming year.
Director at accountancy firm Grant Thornton, Mike Warburton, told The Sunday Times: “It was always likely that freezing the threshold would bring more families into inheritance tax, but this has been brought into sharper focus by the recent revival in the housing market.
Meanwhile, The Treasury told the publication: “Over 96 per cent of all estates do not have to pay inheritance tax. Since 2009, the value of core estate assets such as domestic property has fluctuated significantly. Despite this, the number of estates paying tax has remained at less than 4 per cent for over four years.”