Halifax projects that the revenue the Exchequer collects from inheritance tax (IHT) could rise to £5.6bn* a year in today's money by 2020. That is a 249% increase from the £1.6bn the Exchequer received in 1996/97, the last time the IHT threshold was raised significantly.

 

Halifax forecasts that this increase in inheritance tax revenue will coincide with the largest intergenerational transfer of housing wealth in history. The Halifax estimates that £360bn, in today's money, of housing wealth will pass from one generation to another during the period 2006-20.

 

Inheritance Tax threshold is linked only to RPI

The Halifax IHT revenue estimates are based on the threshold only rising in the future in line with retail price inflation (2% pa). That is the policy pursued by successive governments from both political parties. If the threshold was increased in line with house price inflation, the average annual increase would be 6% pa.

 

Halifax forecasts that the failure to link the threshold to house prices could generate an extra £1.1bn per annum in inheritance tax for the Exchequer by 2015 (in today's terms), rising to an extra £2.3bn per year by 2020. Indexing the threshold in line with the retail price index consistently underestimates the rise in house prices. Over the past twenty years, Halifax calculates that house prices increased by 356% against a 102% increase in retail prices.

 

4.6 million properties valued above the IHT threshold by 2020

Halifax calculates that the number of properties in the UK valued at more than the 2006/07 inheritance tax (IHT) threshold of £285,000 now stands at an estimated 1.5 million or 8% of all owner-occupied properties. Halifax projects this will more than triple to 4.6 million by 2020 if the threshold is only increased in line with the RPI.

 

Government raises threshold on ad hoc basis in line with RPI

At present, the government adjusts the IHT threshold on an ad hoc basis with announcements usually made in the Budget. Over the period 1997 to 2004, the IHT threshold was increased broadly in line with retail price inflation each year; rising by 22% in total against a 19% increase in the RPI. In 2005, the Government increased the IHT threshold by 5% to £275,000. A further 4% increase is scheduled for April 2006 to £285,000, followed by a 5% increase in April 2007, bringing the threshold to £300,000.

 

32% more estates to pay inheritance tax by 2020

In 2005/06, 35,000 estates are estimated to have paid inheritance tax, while in 1996/97 15,000 estates paid the tax. By 2020, Halifax forecasts a total of 46,000 estates a year could pay inheritance tax. In 2002/03, housing assets (£5,930m) accounted for 43% of all net assets in estates paying inheritance tax. This is projected to increase to 60% by 2020.

 

Inheritance tax revenue on a par with capital gains tax revenue

According to the government's own estimates**, inheritance tax revenue in 2005/06 will be £3.3bn and it is expected to rise to £3.6bn in 2006/07. This is higher than the anticipated revenues from beer and cider duties (£3.4bn) for 2006/07 and petroleum revenue tax (£2.1bn). It is on a par with anticipated government revenues from capital gains tax (£3.6bn).

 

Majority of extra IHT revenue to come from South of England

The South of England is forecast to account for 73% or £1.7 billion out of the £2.3bn projected extra inheritance tax revenue in 2020. Wales and Scotland combined are projected to account for 5% or £123 million of the projected increase.

 

Average inheritance tax bill forecast at £121,242

In 2019/20, the average amount of inheritance tax per tax paying estate (in today's terms) is forecast to be £121,242. This is 29% higher than the average amount (£94,286) of inheritance tax per tax paying estate in 2005/06. The average value of an estate paying inheritance tax in 2005/06 is estimated to be £511,000.

 

Inheritance tax needs urgent reform

Halifax is not disputing the right of the government to collect IHT. Rather its premise is that the threshold for property taxes should be linked to the underlying movement of 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. 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.

 

No political party has taken a firm stance on Inheritance Tax

Although the Conservatives and the Liberal Democrats have highlighted the need for reform of the IHT regime, neither are currently committed to a specific policy. The Conservatives outlined a number of options for reform prior to the general election in May 2005, including abolishing inheritance tax and index linking the tax to house prices. The Liberal Democrats issued a consultation paper on the future of IHT in autumn 2005 but are yet to come forward with proposals. Labour's policy has been to raise the IHT threshold broadly in line with retail prices.

 

The Halifax is pushing for all political parties to make it their policy to raise the IHT threshold to account for the increase in house prices over the past decade and to link the inheritance tax threshold to house price inflation in the future.

 

IHT threshold would be £425,000 if linked to house price rise in past ten years

Halifax calculates that the 2006/07 IHT threshold of £285,000 would now be £425,000 if it had been increased in line with house price inflation over the past 10 years.

 

Tim Crawford, Group Economist at the Halifax, commented:

 

"Inheritance tax revenues are likely to rise significantly over the next 15 years if the government doesn't index the threshold in line with house price inflation. The ageing of the British population means the number of estates is likely to increase substantially in the future. More of these estates will fall into the inheritance tax net."

 

 

 

The house price data in this report is sourced from the Halifax House Price Index - the UK's longest running monthly house price series with data covering the whole country going back to January 1983.

 

Prices referred to in this report are arithmetic average prices of houses on which an offer of mortgage has been granted. Regions refer to Government Office Regions.

 

Projecting the value of inheritance tax revenue

 

The IHT estimates in this research are based on the assumption that house prices increase at an average annual rate of 5.6% (3.6% in real terms) up to 2020, in line with the long-term historical average growth rate in real terms, while the IHT threshold is projected to only increase in line with retail price inflation, projected at 2%pa and in line with the government's target.

 

Estimating the number of estates with housing asset

 

The number and value of estates with residential housing have been calculated by estimating the number of owner occupation households that pass away in each age group in each year.

 

In summary, these estimates have been calculated by:

1. Forecasting the number of owner-occupier households on an annual basis to 2021. This was calculated by multiplying the official projections of the number of single households up to 2021 by projected owner-occupation rates.

2. Estimating the number of deceased households on an annual basis. This was calculated by multiplying the number of owner-occupier single-households by their annual mortality rate.

3 Estimating the gross value of UK housing inheritance. Projections of the number of deceased owner-occupier single people were multiplied by forecast average house prices to produce an estimate of the total value of residential property that deceased owner-occupiers singles leave behind.

 

Official government projections have been used where possible i.e. population projections and mortality rate projections. Projections have been derived at a regional level, which have been summed to the national level. Projections have also been derived by sex and age group to allow for differences in mortality and owner occupation rates.

 

Estimating the amount of inheritance tax to be paid by estates with housing assets

 

Projected inheritance tax thresholds were deflated back to 2005 and compared to the distribution of current house price sales to determine the proportion of sales likely to be above the threshold in the future. These percentages were then applied to projections of the number and value of estates with housing assets to calculated projected inheritance tax revenues.

 

 

 

FACTORS THAT MAY REDUCE THE LEVEL OF INHERITANCES

 

A number of factors may result on lower inheritances than projected in this research:

 

Average Price of Inherited Properties: the average price may be lower than the average price assumed since these homes may have been less well maintained.

 

Equity Extraction: increasing numbers of older homeowners may release some of the wealth locked up in their properties prior to death.

 

Residential care: a sizeable number of elderly people may need to sell their properties in order to finance staying in residential care, reducing the number of housing inheritances.

 

Background on Inheritance Tax

 

The revenue raised by the government through IHT has risen by £1.3bn since 1996/97 from £1.6bn to £2.9bn in 2004/05. A further rise is estimated in 2005/2006 to £3.3bn. This would represent a more than doubling since 1996/97. (Source: Inland Revenue.)

 

Around 6% of estates are estimated to pay inheritance tax this year (35,000). The number has more than doubled since 1996/97 (15,000). (Sources: Inland Revenue, HMT Pre-Budget Report)

 

Estates valued at under £1,000,000 accounted for 90% of all estates paying IHT and 54% of all IHT revenue raised in 2001/02 (latest available figures). About 40% of taxpayers, accounting for half of IHT revenues, reside in London and the South East, according to two special exercises carried out by the Inland Revenue. (Regional figures are not normally available.)

 

The inheritance tax threshold has risen by 85% since 1995 from £154,000 to £285,000 in March 2006. There was a 30% rise in April 1996 from £154,000 to £200,000. Since then the IHT threshold has broadly risen in line with RPI.

 

House prices have risen by 176% over the past 10 years. The average price now equates to 62% of the IHT threshold compared with 40% ten years' ago. A single flat rate of 40% was introduced for IHT in March 1987. Prior to this date there were a number of tiered rates.

 

The data is prepared from information that we believe is collated with care, but we do not make any statement as to its accuracy or completeness. People seeking to place reliance on the information for their own or third party commercial purposes do so at their own risk.