IHT trap ensnares families and nets record funds

A multi-billion inheritance tax (IHT) bill – caused by a combination of spiralling house prices and an increase in winter deaths – has led to calls for the Government to pay compensation, with campaigners claiming tax rule changes have taken too long to implement.

Around 30,000 families, whose relatives died after the Government announced new, more generous inheritance tax rules in last year’s Budget, have already paid a record £4.7billion in IHT – which is 20 per cent higher than the previous year – with more likely to be affected before April 2017 when the changes are due to be brought in.

Currently, estates worth up to £325,000 can be passed on without paying inheritance tax with a rate of 40 per cent payable above the threshold.  In April 2017, the Government will introduce an additional tax-free allowance which will initially allow homeowners to bequeath an extra £100,000 to their families, or £200,000 for a couple.

The rules will be relaxed further by 2020, allowing them to bequeath an extra £175,000 in property wealth, which equates to a new allowance for property owners of £500,000 – or £1million for couples.

A HM Treasury spokesperson said: “The Government wants families to be able to pass on their home to their children or grandchildren. We recognise that more families are being pulled into the inheritance tax net than ever before, with the number set to double over the next five years.

“That’s why we’re reforming the rules to bring down the number of families paying inheritance tax, with over 30,000 estates taken out of paying inheritance tax in 2020-21 alone.

“Under the new system families will have a new £175,000 inheritance tax allowance for their home on top of the existing £325,000 threshold – allowing them to pass £1 million onto their children completely free of inheritance tax.”

Tim Martin a partner and Inheritance Tax expert with Moore Thompson, said: “It is understandable that many families feel unfairly penalised by this tax, which the Government has already admitted is unfairly targeting death duties in a way which was never intended.

“Soaring house prices in recent years have had the effect of pushing comfortably well off homeowners into the same tax bracket as the super-rich and a spike in deaths last winter has resulted in the taxman reaping the benefits.

“Many people are questioning why it is taking two years for the introduction of new IHT rules, with some even calling for compensation. Whilst I think it is highly unlikely that the Government will relax the rules and allow the new rates to be applied retrospectively, it does highlight the need for effective planning to ensure IHT is minimised.”