Government's house price wheeze means more tax

Coin stacks arranged to form a house shape. Concept image about rising house prices and mortgage costs. Copy space on the left sInheritance tax (IHT) may not be a mandatory tax but it's getting harder to avoid as house prices rise and the threshold fails to keep pace.

Once widely considered a tax on the rich, the prevalence of IHT being paid by 'ordinary' people is increasing.

IHT is paid on estates that exceed the nil rate band or threshold of £325,000 for individuals or £650,000 for spouses and civil partners who can combine allowances, so 40% of any value over that amount goes to the taxman, and the number of estates and families caught in the IHT net is increasing.

According to the Institute of Fiscal Studies, IHT is expected to contribute £24.3 billion to Treasury coffers over the next five years and recent estimates suggest 250,000 families could pay IHT by 2019.

The year 2019 is a particularly relevant year when it comes to IHT because the £325,000 threshold is frozen until then. Despite a £1 million IHT threshold being a cornerstone of the Tory manifesto in 2010 the nil-rate-band has been frozen at £325,000 for the past six years and isn't going anywhere soon.
It is this failure to increase the threshold which has meant more people have fallen into IHT, not because all of us have got significantly richer – if only that were the case.

And the main source of this wealth is property. While the value of our homes has increased, the threshold has not. This strikes me as a clever move from the government. Arguably it has been the one pushing up our property prices and inflating the market by guaranteeing the mortgage market and providing lenders with cheap cash to lend out as home loans.

On the one hand the government is helping us to bask in the glow of our increasingly expensive homes but that will turn into a very nasty sunburn because it is creaming off the tax when we die.

Some people will argue that IHT shouldn't matter, you'll be dead anyway so what do you care? But for many people leaving a legacy is important, particularly in today's straitened times when younger generations are struggling to pay their way and get on to the property ladder.

IHT can be avoided through clever planning, but what would be nice to see is a more balanced approach to stimulus and tax. The government shouldn't penalise people with massive tax bills but it shouldn't inflate the market either, we can't have it both ways but neither can the government.

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