Increase in threshold designed to stem revolt

The Chancellor attempted to head off a growing middle-class revolt over inheritance tax (IHT) with above-inflation increases in the threshold at which the duty is payable.

The Chancellor attempted to head off a growing middle-class revolt over inheritance tax (IHT) with above-inflation increases in the threshold at which the duty is payable.

Mr Brown said he would raise the value of estates above which the 40 per cent duty is payable from £263,000 to £275,000 in the 2005-06 tax year. There will be further increases to £285,000 and £300,000 in the 2006-07 and 2007-08 tax years respectively.

The move was a break from the Chancellor's usual practice of simply raising the threshold in line with inflation. It is also the first time that he has announced more than one year's increase at a time.

The rises follow mounting concern that IHT will become an issue for increasing numbers of families because the price of property - most people's most valuable possession - has risen so much more quickly than general inflation over the past 10 years. The Conservative leader, Michael Howard, has already indicated that a significant rise in IHT thresholds is likely to be in the Tory election manifesto.

The Chancellor said yesterday that just 6 per cent of all deaths in the current tax year would result in IHT liability for those inheriting estates. But Mike Warburton, a partner at the accountants Grant Thornton, said the figure was misleading. "Inland Revenue figures show that around 40 per cent of people who die each year are survived by their husband or wife," he said. "As estates are always free of IHT when they are passed to a spouse, it is actually more like one in 10 estates that are now caught by IHT."

Halifax warned that the relatively small number of estates paying IHT masked a larger potential problem for future taxpayers. Research from the bank shows 2.4 million properties are now worth more than the tax threshold, with 14 per cent of all property sales over the past year above the cap, compared with 3 per cent 10 years ago.

The bank said if the IHT threshold had been raised in line with house price inflation over the same period, it would now stand at £390,000. As a result, revenues from the tax are set to hit £3.3bn by next April, more than double the £1.6bn which was taken in 1996-97.

IHT advisers gave yesterday's increases to the threshold a lukewarm welcome, even though the average rise of about 4.5 per cent was well ahead of the current rate of inflation.

Stephen Herring, a tax partner at the accountants BDO Stoy Hayward, said: "We are disappointed the Chancellor has not mirrored the 100 per cent increase applied to the stamp duty threshold, which is also driven by house price inflation." Bob Rothenberg, a partner at the accountants Blick Rothenberg, said: "What Mr Brown has done is very limited: he's announced several years worth of thresholds in advance in order to be able to say the cap will reach £300,000."

* From December, when new laws enabling same-sex partners to officially register their relationships take effect, gay couples will be entitled to the same IHT exemptions as husbands and wives. All asset transfers between married couples in their lifetimes and on death are free from IHT. However, the exemptions will not be extended to unmarried heterosexual couples.