e-mail Paul Lewis on paul@paullewis.co.uk
There is a new fear stalking the land. Inheritance tax. When Labour came to power in 1997, it mainly hit wealthier people, taxing the estates of just one in forty of the people who died. Not any more. This year the tax is due when someone dies leaving an estate worth more than £250,000. Not long ago, leaving a quarter of a million pounds seemed like considerable wealth. And it still is a significant amount of money for those fortunate enough to inherit it. But this year the average price of a home in London is close on £200,000. If prices carry on rising as they are it will only be a year or two before the average home in London will be worth enough to be liable to inheritance tax when the owner dies.
And if you think this is just a problem for southerners, think again. In towns and cities all over Britain, the £250,000 home is becoming more common. And that is especially true of those bigger older family homes that people struggled to buy a generation or more ago. According to the Inland Revenue around one in twelve homes that were sold in the last twelve months fetched more than a quarter of a million pounds. Halifax, the bank which produces the most reliable estimate of the value of homes, says that nearly one and half million people now live in a house or flat that would be subject to inheritance tax if they died.
All this is a nice little earner for the Chancellor. In 1996/97 inheritance tax affected 15,000 people and brought in just over £1.5 billion. This year it will hit 24,000 people and bring in £2.5 billion. As house prices rise, so will the Chancellor’s take. The reason is simple. The threshold for paying inheritance tax rises with price inflation. At the moment that is very low, but house price inflation is as high as it has ever been. Over the last five years the threshold for paying inheritance tax has risen by just 16%, but the price of a home has gone up by 52%. And it is getting worse. This year the threshold for inheritance tax rose 3%. In the same period, house prices rose by 16% and are currently going up by nearly 20% a year.
Economists call it fiscal drag. And it is dragging more and more people into the scope of inheritance tax just because they have been prudent enough to buy a home and fortunate in where they bought it. This year, 24,000 people – one in twenty five estates – will have to pay it. Instead of being a tax for the rich, inheritance tax will soon become a routine levy on dying. And at 40% on the value of the estate above the threshold, it can be a lot of money. Someone who left a £400,000 home and nothing else would have £60,000 taken by the Chancellor.
So how soon will it be before your home will take you into the inheritance tax net? When it does – and given long enough it is ‘when’ not ‘if’ – there is not much you can do to reduce the tax you have to pay. Unlike wealthy people – who can put property in trust, give money or property away each year, and pay for expert tax planning advice to mitigate the liability of their heirs – people whose wealth is almost exclusively the family home are stuck. You cannot just give it to your children and carry on living there – the taxman counts it as if you still owned it. So instead of your children inheriting the family home, they will have to sell it to pay the tax and split whatever is left between them. It is a sad and undignified end for the home you love – and perhaps they grew up in.
There is a simple answer. For people born before World War II buying a home was the key to wealth and security in old age, and the way to leave something to their children. For them, the main asset they leave in their will is their home. So the rise in inheritance tax should be linked not to the rise in retail prices, which is irrelevant, but to the value of homes. If the Government had raised the inheritance tax threshold in line with house prices since it came to power in 1997, it would be around £325,000 today and would rise to nearly £400,000 next year. That would keep down the number paying inheritance tax and help make sure that it did what it was intended to do – tax the estates of the better off. Not dip the Chancellor’s hand in the growing value of the homes that our generation struggled to buy out of our hard-earned income. And it would be one less thing for us to worry about as we get older.
Autumn 2002
e-mail Paul Lewis on paul@paullewis.co.uk