More detached property owners are potentially liable to pay inheritance tax (IHT) than five years ago with one in three (29%) detached property sales in the UK above the 2006/07 IHT threshold of £285,000. The revenue raised by the government through IHT has risen by £1.3bn since 1996/97 from £1.6bn to £2.9bn in 2004/05. A further rise is estimated in 2005/2006 to £3.3bn. This would represent a more than doubling since 1996/97.

Five years ago only 13% of detached properties were sold above the then IHT threshold of £234,000. Halifax calculates that in London 82% of detached property sales occurred above the IHT threshold over the past year, followed by the South East (59%) and the East of England (37%).

The average price of a detached property is above the inheritance tax threshold of £285,000 in London (£563,085), the South East (£390,353) and the East of England (£298,430). The average price of a semi-detached property is above the inheritance tax threshold of £285,000 in London (£334,510).

Sales above the inheritance tax threshold accounted for at least 50% of detached house transactions in 9 counties. All of these were in London and the South East, apart from the City of Edinburgh.

Key Findings of the Halifax research shows that:

• Sales above the inheritance tax threshold accounted for at least 25% of detached house transactions in 38 (36%) counties. 20 of these were in Southern England. However, Scotland accounted for 6 of the total, while 5 were in the West Midlands and four in Wales.
  
  
• 44% of semi-detached house sales in Greater London were above the IHT threshold of £285,000 in the past year. 13% of semi-detached transactions in the South East were above the threshold.
  
  
• Sales above the inheritance tax threshold accounted for 25% of Semi detached house transactions in 4 (4%) counties.
  
  
• Halifax calculates that the 2006/07 IHT threshold of £285,000 would now be £425,000 if it had been increased in line with house price inflation over the past 10 years. House prices have risen by 176% in the past ten years compared to only a 85% increase in the IHT threshold.

Tim Crawford, Group Economist at Halifax commented: "The Inheritance tax threshold has failed to keep pace with the growth in house prices over the past ten years. Many more detached properties are now caught in the inheritance tax net. We call on the government to index the inheritance tax threshold for the increase in house prices in the past ten years, which would bring it to £425,000 and to link the inheritance tax threshold to house prices in the future."

BACKGROUND ON INHERITANCE TAX

Successive governments (of both main political parties) have increased the IHT threshold on an ad hoc basis. Over the period 1997 to 2004, the IHT threshold was increased broadly in line with retail price inflation; rising by 22% against a 19% increase in the RPI and 129% growth in house prices. In 2005, the threshold was increased by 5% to £275,000. A further 4% increase is scheduled for April 2006 to £285,000, followed by a 5% increase in April 2007, which will bring the threshold to £300,000.

The revenue raised by the government through IHT has risen by £1.3bn since 1996/97 from £1.6bn to £2.9bn in 2004/05. A further rise is estimated in 2005/2006 to £3.3bn. This would represent a more than doubling since 1996/97. (Source: Inland Revenue.)

Around 6% of estates are estimated to pay IHT this year (35,000). The number has more than doubled since 1996/97 (15,000). (Sources: Inland Revenue, HMT Pre-Budget Report)

Estates valued at under £1,000,000 accounted for 90% of all estates paying IHT and 54% of all IHT revenue raised in 2001/02 (latest available figures). About 40% of taxpayers, accounting for half of IHT revenues, reside in London and the South East, according to two special exercises carried out by the Inland Revenue. (Regional figures are not normally available.)

The IHT threshold has risen by 85% since 1995 from £154,000 to £285,000 in March 2006. There was a 30% rise in April 1996 from £154,000 to £200,000. Since then the IHT threshold has broadly risen in line with RPI.

House prices have risen by 176% over the past 10 years. The average price now equates to 62% of the IHT threshold compared with 40% ten years' ago. A single flat rate of 40% was introduced for IHT in March 1987. Prior to this date there were a number of tiered rates.

* The house price data in this report is sourced from the Halifax House Price Index - the UK's longest running monthly house price series with data covering the whole country going back to January 1983.

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