One in ten estates will be paying inheritance tax by 2018
The Treasury's receipts from IHT fell sharply in 2007 with the introduction of a transferable nil- rate band. At the same time the financial crisis put a temporary stop to the house price boom, which is responsible for drawing most families into the IHT net. Currently, the tax brings in about GBP3.5 billion – less than 0.2 per cent of the UK's national income in 2013–14.
However, house prices in south-east England have now resumed their inflationary trend, while the nil-rate band has remained stuck at GBP325,000 and will continue to do so unless there is a change of government policy. The eight-year freeze on the nil-rate band represents a cut in value of 22 per cent, or GBP70,700, after inflation.
As a result, the IHT take will increase to GBP5.8 billion in 2018–19, according to the government's Office for Budget Responsibility. In that year, IHT liabilities will take a bigger share of the national income than at any time in the past 45 years, says the IFS – unless the tax is reformed.
Conservative Party leader David Cameron has recently hinted that a newly elected Conservative majority government would increase the IHT nil-rate band, perhaps to the GBP1 million it promised at the last election. If that had happened in 2010-11, the Treasury's receipts would have fallen by at least GBP1.8 billion, reducing the total IHT yield by 70 per cent to GBP0.8 billion, says the IFS. If it happens in 2018 or 2019, though, it will cost a great deal more, says the IFS.
The organisation speculates that a government that significantly increases the nil-rate band will also have to consider more drastic reforms of the IHT regime to balance the resulting loss of tax revenues. These could include removing or reducing the reliefs given for agricultural land and business assets, and extending the reach of the tax to gifts made more than seven years before death – although the IFS's preferred option, of abolishing IHT in favour of a tax on beneficiaries' receipts, seems unlikely to be considered.
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