2.4m face house price tax hit

THE housing boom has pushed almost half a million extra homeowners into the inheritance tax net because the sharp rise in house prices has outpaced increases in tax thresholds.

Almost 500,000 estates will have to pay inheritance tax (IHT) because their properties alone take their value above the IHT threshold of £263,000.

Inheritance tax is levied at 40% on anything worth more than that amount. According to figures from the Halifax, some 2.4m people are now liable to pay inheritance tax.

The Government increased the IHT threshold by just 3.1% in April from £255,000 to £263,000. Yet house prices jumped by 12% in the first half of 2003. When IHT was devised, it was intended to catch very high net worth individuals who tried to pass on vast estates to their families.

Now, with the average UK house worth £160,000 – and much more in London and the south-east – people who do not consider themselves particularly wealthy will find themselves caught up in the IHT net.

And if house prices see just a gentle tailing off rather than a crash, few people are likely to escape the taxman‘s attentions.

According to the Halifax, if the IHT threshold had kept pace with house price inflation over the past 10-11 years, it would now stand at £359,000, which would leave out a vast number of households.

According to the Halifax, 2.4m properties were valued above the IHT threshold in the first half of this year, compared with 1.9m in the last quarter of 2003 and just 1.5m at the same point a year before.

Since the 1992/1993 tax year, the inheritance tax threshold has risen by 75%, but during the same period house prices have gone up by 139%.

Martin Ellis, chief economist at Halifax, said the figures were a warning to homeowners to plan ahead and make sure their families were not landed with a big inheritance tax bill. He added: ?The government's reluctance to raise the threshold in line with house prices means that more and more ordinary people are now finding that their estate will potentially be subject to inheritance tax. We therefore advise homeowners to plan ahead to minimise the possible impact.‘

The biggest percentage rises in the number of properties valued above the IHT threshold in the first half of this year have been in Yorkshire and the Humber (49%) and the North West (46%), reflecting the strength of the housing market in the north. Indeed, more than 60% of the homes rising above the IHT threshold were outside London and the South East.

The Government‘s success in raking in more income is reflected in a near doubling of receipts from inheritance tax. The Government brought in £455m in 1992/3 from inheritance tax on residential property only, but by 2002/3 this had jumped to £880m. IHT as a whole brings in £2.5bn, but people can reduce their exposure with a little careful tax planning and making sure they take obvious precautions, such as drawing up a will.