Middle Class Discontent Grows as Inheritance Tax Returns Top £4 billion

This year, and for the first time ever, the Treasury will net more than £4bn in inheritance tax (IHT). According to the Office for National Statistics, IHT receipts this year amount to £4.6bn, a significant increase on the £3.8bn collected for 2014/15.

This has prompted a wave of discontent among the middle classes who have found themselves penalised for relatively small increases in their wealth.

There are two main factors driving the increase in IHT revenue.

 

  • House prices have continued to rise,
  • An unexpected increase of elderly people dying from flu.

A continued and consistent rise in house prices is – in general terms – a welcome phenomenon. In 2015, the year-on-year average rate for house price growth accelerated to 5.7% (from an average over the decade of circa 2.5%). But, in the context of the average UK house being worth over £200,000, this has created unwelcome fiscal drag. The current available data from the Office for Budget Responsibility (OBR) suggests that the number of UK families paying inheritance tax has risen drastically as a result.

Those affected are not the wealthy as we might understand them, merely ordinary people seeking to pass on their estates to their children who do not wish to forfeit cash to the government at the moment of death. These “death duties”, as the media refers to IHT, are widely regarded as unwarranted, cynical and morally suspect.

Consequences for IHT Planning

 

Simply put, if either a home or other property has risen in value so that an estate’s value surpasses the current threshold set at £325,000, then Inheritance Tax becomes due.

Fiscal drag occurs when the increase in value of your assets catapults you into a tax-band that you barely deserve to be in. To make matters worse, the shift into IHT territory is severe – from 0% to 40% in less time than it takes to complete your tax return.

What does this all mean for the ordinary middle-class family?

 

This year there will be more than 40,000 families paying inheritance tax. In 2010 this number stood at a mere 10,000. The OBR projections suggest no let-up in the velocity of movement along this trajectory. It is little wonder then that behind twitching curtains in Solihull, Sheen, Carlisle and Chiswick, there are murmurs of discontent.

For its part, the government has stated that it will increase the IHT threshold from £325,000 to £500,000. However, this will not have effect until 2017. This ‘jam tomorrow’ response is likely to be of little comfort to the 40,000 households swept into the IHT fold this year.

Further, it is a truism that most families now eligible for IHT are likely to have already paid tax on their money, either through income tax or some other penalty. ‘Double taxation’ is never going to win over the electorate, but the nuances of the debate have sadly been lost in the ill-informed furore around ‘tax avoidance’ (current definition unknown).

© LaingRose Ltd. 2018