Fewer estates will be liable to pay inheritance tax (IHT) in 2009-10 than at any point in the last 70 years according to the latest official estimates.
Just 12,000 will be caught by the 40% tax, and government revenue from IHT is expected to fall to £2.25bn this year, down from £2.83bn for 2008-9 and £3.82bn for 2007-8.
The fall in numbers is explained by two factors – a change in the rules, which was announced by the Chancellor, Alistair Darling, in the October 2007 Pre-Budget Report, and a steep fall in house prices.
The new rules, which were announced in October 2007, allow married couples and civil partners to combine their IHT free allowance, so that many couples effectively double the nil-rate band. This has risen steadily over the last few years, from £285,000 in 2006-7 to £312,000 in 2008-9 and £325,000 in 2009-10. As property passed from one partner to the other is not taxable, the surviving spouse often has a ‘double allowance’ of £650,000, which means that they escape paying IHT altogether. This contrasts sharply with the situation before 2007, when all estates over the single allowance were liable. The 12,000 figure estimated for 2009-10 is around 2% of all estates.
Falling property prices
The number of estates liable for IHT had been rising steadily, from 1996-7, when it stood at 15,000 to 2006-7, when it reached 34,000. This was largely due to rising property prices. The Halifax House Price Index, for example, rose from 208.6 in 1996 to 635.9 in 2007, an increase of over 200%, with average prices going from £64,441 to £196,478.
During 2008 there was a 7.9% fall in house prices. Although this now shows signs of slowing, prices are still subdued and estates worth less than they once were.
Further exemption proposed
The Conservative shadow chancellor, George Osborne, has proposed raising the IHT threshold still further, to £1m. This would give a potential tax-free allowance of £2m for married couples and civil partners.
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