Halifax research, based on recently released data from HM Revenue & Customs, shows the total number of estates paying inheritance tax (IHT) rose by 72% over the five years to 2003/04 to 30,451. The Government's own estimates suggest a further 22% increase in the number of estates paying the tax by the end of 2006/07.

More estates are now paying IHT as the threshold for the tax has failed to keep pace with the increase in property prices over the past decade. The IHT threshold was increased to £285,000 in the latest Budget. Further small increases have been announced for the next few years, taking the threshold to £325,000 in 2009/10. IHT is paid at 40% on amounts above the threshold.

More estates worth less than £500,000 now pay IHT

The number of estates* with a value of less than £500,000, paying IHT rose by 75% over the five years to 2003/04 to 21,750. These estates now account for 71% of all estates paying IHT.

25% of total IHT revenues generated from estates worth less £500,000

In 2003/04, 8% of all estates worth less than £500,000 paid IHT, up from only 5% in 1998/99. The average amount of IHT paid by these estates was £31,393. Estates valued less than £500,000 accounted for 25% of total IHT revenue in 2003/04, £683m.

Estates valued over £2 million account for smaller share of IHT revenue

Estates worth more than £2,000,000 accounted for 19% of total IHT revenue in 2003/04, £526m, down from 23% of total IHT revenue in 1998/99. Estates valued between £500,000 and £1,000,000 generated the most IHT revenue in 2003/04, £921m, or 33% of the total.

Last financial year (2005/06) the government collected £3.3bn in IHT revenue and projects £3.6bn in revenue in the current financial year (2006/07). Over the past five years there has been a 49% increase in IHT revenue.

Tim Crawford, Group Economist at Halifax, said: "The steep increase in the number of estates paying inheritance tax highlights that the current inheritance tax threshold of £285,000 is too low. Significantly, families with lower valued estates are paying an increased share of the total inheritance tax take whilst the super-rich are paying a smaller share.

This trend is set to continue unless the government raises the threshold in line with house price inflation. We call on the government to raise the inheritance tax threshold to £430,000 to account for the increase in property prices over the past ten years."

BACKGROUND ON INHERITANCE TAX

Successive governments (of both main political parties) have failed to increase the IHT threshold inline with house price growth. Halifax calculates that the 2006/07 IHT threshold of £285,000 would now be £430,000 if it had been increased in line with house price inflation over the past ten years. House prices have risen by 179% in the past ten years, compared with just an 85% increase in the IHT threshold.

The IHT threshold has risen by 85% since 1995 from £154,000 to £285,000 in April 2006. There was a 30% rise in April 1996 from £154,000 to £200,000. 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 with a further 4% rise seen in April 2006 to £285,000. The government has scheduled further small increases in the threshold up to £325,000 by 2009/10.

The revenue raised by the government through IHT has risen by £1.7bn since 1996/97 from £1.6bn to £3.3bn in 2005/2006. (Source: Inland Revenue.) 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.)

House prices have risen by 179% 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 government's projects 37,000 estates will pay inheritance tax in 2006/07, 22% higher than in 2003/04. (Source: Table 1.4 http://www.hmrc.gov.uk/stats/tax_receipts/menu.htm)

*estates in this analysis refer to estates notified for probate