Inheritance Tax warning: Treasury to profit from thousands of Britons paying ‘stealth' tax

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Despite the Inheritance Tax (IHT) thresholds staying put, more and more people will pay the tax as the value of their estates increase. Inflation and a surge in the housing market are believed to be the culprits behind this trend.

The number of people paying Inheritance Tax will more than double in the next five years compared to pre-pandemic levels, as nearly 50,000 people will be subject to the levy annually by 2026.

These figures were unveiled by the latest predictions from the Office for Budget Responsibility, which has been published alongside the Budget.

Earlier this year, the prediction was that 36,000 people would be paying the 40 percent Inheritance Tax rate by 2026, with the latest figures projecting that 14,000 additional Britons will be made to pay it.

The stark difference in projections in the last six months are believed to be the bi-product of higher-than-expected inflation, rising house prices and a five-year freeze in tax breaks announced at the spring Budget.

Inheritance Tax warning: Treasury to profit from thousands of Britons paying ‘stealth' tax
© GETTY inheritance tax threshold uk rishi sunak

The COVID-19 pandemic had already impacted the projections, with these further developments only compounding the trend towards more people paying IHT.

The total amount British families will pay in Inheritance Tax is expected to reach £7.6billion by 2026, which is an increase of £1billion from the March projection of £6.6billion.

The Government is expected to benefit to the tune of £2.7billion in additional revenue through Inheritance Tax in the next five years.

The Chancellor of the Exchequer, Rishi Sunak has promised to cut taxes by the time the current Parliament ends in 2024.

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Mr Sunak has frozen income tax bands and raised the rates of National Insurance, dividend tax and corporation tax as a reaction to the economic fallout of the pandemic.

Even though the £325,000 IHT allowance has not risen since 2009, more families appear to be on course to be caught out as their investments and properties rise in value.

For example, house prices have gone up by 10 percent in the last year, which is believed to be due in part to Mr Sunak’s stamp duty holiday, which led to increased activity in the market.

Inflation is another issue which is bumping up the value of people’s assets, as it is now projected to rise at an annual rate of 4.4 percent, a huge increase from the March projection of 1.8 percent.

Inheritance Tax warning: Treasury to profit from thousands of Britons paying ‘stealth' tax
© GETTY what is state pension

Robert Salter, of Blick Rothenberg described it as a “stealth” tax.

Inheritance Tax is a tax on the estate, which is the property, money and possessions, of someone who has died.

There is normally no Inheritance Tax to pay if either the value of their estate is below the £325,000 threshold or they leave everything above the £325,000 threshold to a spouse, civil partner, charity or community amateur sports club.

The threshold can increase to £500,000 for people who give away their home to their children or grandchildren.

Inheritance Tax warning: Treasury to profit from thousands of Britons paying ‘stealth' tax
© GETTY inheritance tax threshold uk rishi sunak

Those who are married or in a civil partnership and have an estate worth less than the threshold can add any unused threshold to their partner’s threshold when they die. This means their threshold can be as much as £1million.

The standard Inheritance Tax rate is 40 percent and is only charged on the part of one’s estate that is above the threshold.

For example, on an estate worth £600,000, one would pay 40 percent Inheritance Tax on £275,000.

It is possible to pay a reduced rate of 36 percent on some assets, providing one leaves 10 percent or more of the net value of their estate to charity.

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