The taxman is raking in a record amount of money from inheritance tax, mostly as a result of rising house prices, new official figures have revealed.
HM Revenue and Customs collected £4.7billion in inheritance tax in 2015/16- a 22 per cent increase on the previous tax year, when IHT receipts were £3.8billion.
This was also the highest ever amount since the current tax system was introduced 30 years ago and almost double the 12 per cent growth recorded the previous year, according to the figures released by the Office for National Statistics today.
An individual can pass on wealth up to the value of £325,000 without paying tax and a couple can pass on £650,000. Anything over this amount is taxed at 40 per cent.
This threshold has been unchanged since 2009 and soaring house prices, especially in London and the South East, have dragged an increasing number of people into paying the tax.
Critics argue that a tax initially intended to capture only the rich is now being paid by people who are not particularly wealthy but have seen their family home rise in value.
Experts warned today that upcoming changes to the inheritance tax rules are creating confusion, leaving some families unexpectedly caught out by the tax.
The ONS said that the rise in receipts was also driven by a six per cent increase in the number of deaths leading up to 2015-16 compared to the previous year.
‘Each year, residential property makes up approximately a third of the total value of taxpaying estates and the ongoing rise in property prices has contributed to a rise in overall tax take,’ the ONS said.
‘At the same time, as the average value of estates rises, an increasing number of estates will now be valued over the IHT threshold (or nil rate band), which has been frozen at £325,000 since April 2009. An increasing number of estates could, therefore, potentially be liable for IHT.’
Regional figures, although only available for the tax year 2013-14, show that the biggest chunk of inheritance tax is paid in London and the South East, mostly because of the higher house prices in the region.
In the capital, the average home was priced at £472,163 in May as compared to the national average of £211,230, according to the ONS.
High property prices means that the average IHT due per taxpayer in London was £223,000 and in the South East it was £176,000. This compares to £147,000 in Wales and £142,000 in the North West of England, the ONS said.
Lucy Brennan, partner at accountancy firm Saffery Champness, said: ‘The year on year increase in the number of deaths liable to IHT demonstrates the effect of the continued upward march we had before the Brexit vote in property and share values, as the UK was coming out of recession, and a nil rate band that has been frozen since
April 2009 which has pushed more and more people into a tax that they were not intended to pay.
‘The government has resolved the fiscal drag on income tax, but is not rushing to give relief on IHT.’
Hugi Clarke, director at investment manager Foresight group, said the figures showed that more people than ever before had to pay inheritance tax and that this would continue as many grapple with recent changes to the tax.
In the 2015 Summer Budget, George Osborne announced a main residence allowance, which will gradually increase from £100,000 in April 2017 to £175,000 per person by 2020-21.
This will effectively raise the IHT threshold to £500,000 per homeowner, meaning that parents who jointly own a property up to £1million will be able to leave it to their children without having to pay any inheritance tax.
Mr Clarke added that many people were confused by the new legislation and added: ‘In particular, the introduction of the “Residential Nil Rate Band” convinced many with estates valued at £1million or less that they no longer had an IHT problem.
‘As such, many have chosen to defer or ignore opportunities to reduce their inheritance tax bill, not appreciating that the benefits of the RNRB do not commence until April 2017 and will not be fully available until April 2021.
‘We are likely to see IHT receipts continue to grow in the coming years as more unsuspecting members of the public fall foul of this confusing piece of legislation.’
Les Cameron, a tax specialist at Prudential, said: ‘Planning for inheritance tax is at its most valuable when it is done early and has become increasingly important with the additional options and complexities brought about by the new rules allowing individuals to pass on pension savings to family members.’