Inheritance tax threshold used to be thought of as a tax only on the richest in the UK, but it is increasingly affecting ordinary taxpayers, particularly in the South East of England as the average cost of a home exceeds the ‘death tax’ threshold for the first time.
The inheritance tax threshold has been frozen at £325,000 by the Conservative Government since April 2009 and with house prices having increased so significantly in recent years, particularly in the South East, the average house price has reached now £326,000. Jonathan Isaby of Taxpayers’ Alliance has criticised the freezing of tax thresholds against the forces of inflation in a move to raise extra revenue as ‘stealthy and fundamentally dishonest’. The Treasury predicts its revenues from inheritance tax will rise from £3.5billion to £5.8billion by the end of the decade.
Against a climate of increasing concern that inheritance tax is hitting ‘ordinary’ people and being used as a method to raise extra revenue, there has been talk of increasing the nil rate band, and it may even be the case that next year’s Conservative members will revive their pledge to increase the threshold to £1m. On the other hand, the main proposal on the table at present is that the Labour Party has promised to introduce an additional Annual Wealth Tax on high value homes (the ‘mansion tax’) if it gains power in next May’s general election.
The proposed annual levy would apply to property valued over £2 million, affecting between 58,500 and 110,000 homes.
There are two concerns which arise from this proposed policy:
- Although intended to target a small proportion of society, the future government may lower the annual levy threshold within its first year of operation, hitting the ordinary taxpayer. There is concern that as the current government lowered the threshold for the Annual Tax on Enveloped Dwellings (ATED) from £2million to £500,000 in its first year, this may have created a precedent for future governments to act similarly;
- A key issue is how HMRC would decide whether a property which has not been sold or valued for many years is worth more than the threshold amount. Knight Frank has estimated that over 250,000 home owners may be expected to value their homes every five years. Those who choose not to do so will most likely be hit by heavy penalties.
As next year’s General Election comes closer, it is likely that tax issues such as these will increasingly come under the spotlight, and being able to plan efficiently in the context of a fast-changing tax environment is likely to become increasingly important.
If you require further information about these topics please contact a member of the Edwin Coe Private Client team.
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