Inheritance tax (IHT) receipts are nearing their pre-crisis peak, driven by rising house prices in the UK, which have been fuelled by the increase in mortgage activity but lack of new housing.
These receipts increased by 8.6 per cent year-on-year to £3.4bn in 2013-2014, according to the Office for National Statistics (ONS), on the back of rising house prices. The IHT threshold of £325,000, above which any assets are charged a 40 per cent tax rate, has remained unchanged since 2009.
Increasing values of estates, along with static tax thresholds, have been cited by the ONS as a main source of revenue growth for the government.
Daniel Bailey, mortgage broker at Middleton Finance, said, “The IHT threshold is out of date and certainly needs to be reviewed. I would like to see an increase in the threshold. There has been a significant increase in house prices over the past 20 years and this has resulted in many more homeowners facing the prospect of paying inheritance tax.”
The Office for Budget Responsibility recently predicted that the number of estates that will be subject to IHT will increase dramatically by 2018-19 due to the government’s commitment to freeze the nil-rate band until 2018.
Chris McNab, protection manager at LV=, said, “As house prices continue to increase it is important that families look to the future and consider that they may have been in danger of going over the threshold.”
UK house prices increased by 10.2 per cent in the year to June 2014, according to the ONS’s recent house price index.
Meanwhile, the Council of Mortgage Lenders (CML) estimates that gross mortgage lending reached £17.5bn in June, 17 per cent higher than June 2013 when it totalled £14.9bn and the highest monthly figure since £17.6bn in October 2013.
Gross mortgage lending for the second quarter of this year was an estimated £50.8bn, a 10 per cent increase from the first three months of this year and 21 per cent up on the second quarter of 2013.
Limitations on the issuance of mortgages, particularly the Help to Buy programme, have come into effect as it has become a concern that the over supply of mortgages and lack of new housing are driving factors behind the rising house prices.
Lloyds cut the amount that Help to Buy borrowers can apply for by 70 per cent from £500,000 to £150,000, amid concerns that the scheme is stoking a housing bubble.
The Bank of England has also put restrictions that lenders cannot issue loans of more than 4.5 times a borrower’s income, and that banks are obliged to test borrower ability to pay back their loans in the case that interest rates rose by three percentage points in the first five years.
The Mortgage Market Review (MMR), which came into effect at the end of April 2014, forces lenders to adhere to more stringent lending criteria when deciding whether to issue a loan or not, thus making it harder for borrowers to obtain a mortgage.
julia.faurschou@ft.com
