Boom in house prices 'to drive inheritance tax up to £5.6bn'

Britons will be paying £5.6bn a year in inheritance tax (IHT) by 2020, figures released today will show - almost 250 per cent more than in 1997, when the Labour Government was elected.

Halifax Bank accused the Government of cashing in on "the largest intergenerational transfer of housing wealth in history".

The bank's analysis shows that 1.5 million properties in the UK are already valued at above the IHT exemption threshold of £275,000. The figure is set to triple to 4.6 million by 2020, if the Government continues with its current policy of raising the value of estates on which IHT is due in line with inflation each year.

The increase in the number of estates potentially subject to IHT is a result of house price inflation over the past 10 years. The IHT threshold has risen broadly in line with inflation, by 22 per cent since Labour came to power. If it had been raised in line with house price inflation, the threshold would now stand at £425,000.

In the current financial year, the Government expects to raise £3.3bn from IHT, twice as much as the £1.6bn taken in 1997-98. This is forecast to rise to £3.6bn in the 2006-07 financial year.

Tim Crawford, Halifax's group economist, said: "Indexing the threshold in line with the retail price index consistently underestimated the rise in house prices. The threshold has simply not kept up with house price inflation, so consequently more and more households are potentially being caught in the net."

The Government estimates only 35,000 estates will be subject to IHT this year, though this is significantly higher than the 15,000 estates that paid tax in 1996-97. Mr Crawford called on the Chancellor, Gordon Brown, to introduce a link between house prices and the IHT threshold in Wednesday's Budget. Although tax is payable only when property owners die and bequeath their homes to heirs, Halifax forecasts that £360bn of housing will be passed on between now and 2020.

The warning comes amid rising concern about the cost of Stamp Duty. Figures to be released next week by the online estate agency Rightmove will show that just 16 per cent of houses are now sold for less than £120,000, the level at which Stamp Duty becomes payable. The average property sold on Rightmove's internet site is just over £203,000, attracting Stamp Duty of £2,030.

The Royal Institution of Chartered Surveyors (Rics) is lobbying the Chancellor to reform Stamp Duty on Wednesday. Rics said the tax was distorting the property market because the Stamp Duty rates increase as properties become more expensive, with the tax payable at the highest rate on the full value.

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