During 2005/06 the government collected £3.3bn in inheritance tax (IHT) revenue and has projected £3.6bn in revenue this financial year (2006/07).

The figures, reported by Halifax highlight the growth in Inheritance Tax takings over the past five years. In that time, there has been a 49% increase in IHT revenue.

IHT revenue was a record £1.7bn in first half of 2006, up £200m or 13% from the first half of 2005. The amount of IHT revenue collected in the first half of 2006 matches total IHT revenue collected over the full financial year 1997/98, only eight years ago. The number of estates paying 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 to 37,000.

Halifax estimates that the number of properties in the UK valued at more than the 2006/07 IHT threshold of £285,000 now stands at 1.5 million, or 8% of all owner-occupied properties. The Group also projects this figure to triple to 4.2 million properties by 2020 if the inheritance tax threshold is only increased in line with retail price inflation.

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Key Points
- IHT revenue hits record levels in first half of 2006
- 72% rise in number of estates paying IHT over 5 years
- 20% of properties projected above IHT threshold by 2020
- Annual inheritance tax revenue projected at £5.5bn by 2020
- IHT threshold would be £430,000 if linked to house prices
- One in three detached house sales above IHT threshold

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If so, Halifax projects that the revenue collected by the Exchequer from IHT could rise to £5.5 billion a year in today’s money by 2020. That is a 244% increase from the £1.6bn the Exchequer received in 1996/97, the last time the IHT threshold was raised significantly.

What you could have been paying
Halifax calculated 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. Halifax added that house prices have risen by 179% in the past ten years, compared with just an 85% increase in the IHT threshold. At present the inheritance tax threshold is projected to rise very gradually to £325,000 by 2009/10.

Types of Property Subject to IHT
One in three (29%) detached property sales in the UK were above the 2006/07 IHT threshold of £285,000 last year. Five years ago only 13% of detached properties were sold above the then IHT threshold of £234,000.

Sales above the inheritance tax threshold accounted for at least 25% of detached house transactions in 38 (36%) counties in 2005. 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.

London’s Factor:
The average price of a detached property is above the inheritance tax threshold of £285,000 in London (£640,499) and the South East (£403,758). The average price of a semi-detached property is above the inheritance tax threshold of £285,000 in London (£362,485), along with the average price of a terrace (£335,456) and a bungalow (£304,659).

In fact, 44% of semi-detached house sales in Greater London were above the IHT threshold of £285,000 in 2005. 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.

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Inheritance Tax Thresholds
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.

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Tim Crawford, Group Economist at Halifax, said: “Inheritance tax revenue, along with the number of estates paying the tax, has risen sharply. This is largely due to the threshold for inheritance tax failing to keep pace with the rise in property prices over the past decade. 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.”