The amount of revenue the Exchequer collects from inheritance tax (IHT) could triple to £5.6bn a year in today's money by 2020, according to a report by Halifax.
The figure represents a 249% increase from the £1.6bn the Exchequer received in 1996/97, the last time the IHT threshold was raised significantly.
Halifax’s revenue estimates are based on the threshold rising in line with retail price inflation (RPI) of 2% p.a., which is the policy pursued by successive governments from both political parties.
If the threshold were increased in line with house price inflation, it says the average annual increase would be 6% p.a.
Halifax forecasts the failure to link the threshold to house prices could generate an extra £1.1bn each year in IHT for the Exchequer by 2015, rising to an extra £2.3bn a year by 2020.
It states that indexing the threshold in line with the RPI consistently underestimates the rise in house prices and calculates that over the past twenty years house prices have increased by 356% against a 102% increase in retail prices.
Further, it calculates the number of properties in the UK valued at more than the 2006/07 IHT threshold of £285,000 now stands at an estimated 1.5 million or 8% of all owner-occupied properties and projects this will more than triple to 4.6 million by 2020 if the threshold is only increased in line with the RPI.
In 2019/20 the average amount of IHT per tax paying estate is forecast to be £121,242 – 29% higher than the average £94,286 of IHT per tax paying estate in 2005/06 – while the average value of an estate paying IHT in 2005/06 is estimated to be £511,000.
While Halifax is not disputing the right of the government to collect IHT, it says the threshold for property taxes should be linked to the underlying movement of house prices.
It adds: “The threshold has simply not kept up with house price inflation so consequently more and more households are potentially being caught in the net. Inheritance tax is a tax intended for the few that the many may now have to pay because of a failure to index link with house prices.”
Although the Conservatives and the Liberal Democrats have highlighted the need for reform of the IHT regime, Halifax says neither is currently committed to a specific policy.
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