Homeowners caught in tax trap

Runaway house prices have exposed more homeowners

By Andrew Verity BBC personal finance reporter

The runaway housing market is leading to a massive jump in the number of families who face giant bills for inheritance tax when the homeowner dies.

Clearly (inheritance tax) is now hitting a lot of people it wasn't meant to hit."

Ray Boulger, Charcol

Independent research commissioned by BBC Radio Five Live shows that as recently as five years ago, only one in forty households were liable for inheritance tax because of the value of their property.

Five years from now, that figure will be one in eight.

Theoretically a tax on the wealthy, inheritance tax, levied at 40%, is now spreading to middle England.

Taxman profits

Already, in the last five years, the number of households facing inheritance tax solely because of the value of their homes has quadrupled.

The problem is that the threshold for inheritance tax - currently £250,000 - only rises very slightly ahead of inflation, whereas house prices have been rising far faster, bringing many homes above the threshold.

Ray Boulger, of mortgage broker Charcol, said: "Apart from existing homeowners it's obvious that one of the biggest beneficiaries from the housing market is the Inland Revenue.

"The Chancellor needs to put the threshold up to a much higher level because clearly it's now hitting a lot of people it wasn't meant to hit."

'Stealth' tax

In a further finding, the BBC has uncovered a massive jump in the amount homebuyers will have to pay stamp duty.

The property boom has benefited the taxman

In 1996, most homes were not worth enough to incur stamp duty at all.

But since then the Treasury has imposed three bands of stamp duty which are failing to keep pace with inflation

In ten years time, one in four homes will be eligible for stamp duty at the middle band of 3%.

Already homeowners pay at least £7,500 in stamp duty for every home bought for more than £250,000.

On houses worth more than £500,000 the stamp duty is 4%, or at least £20,000.

In the past five years stamp duty revenue has quadrupled from £465m to £2.1bn and is expected, on conservative assumptions, to triple in the next ten years.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA), said: "Stamp duty has been a huge windfall for the government. On the biggest houses it's risen by 400%."

"The tax bands of 3% and 4% are causing people to find ways to try to avoid tax - turning ordinary people into tax avoiders simply because it is such a draconian regime."

Unlike inheritance tax, which typically rises in line with the Retail Price Index (RPI), stamp duty thresholds do not rise automatically with each Budget.

Rule-bending

The research is based on conservative assumptions about the housing market.

It makes allowances for a substantial slowdown in the housing market over the next few years with RPI at 2.5% and house prices rising by just 4.7% - the average level between 1970 and 1995, before the recent boom.

Stamp duty is a tax on mobility

Steve Wilcox, Centre for Housing Policy

Inheritance tax is meant to be a tax on people with a lot of wealth to pass on.

But in practice the richest people rarely pay it because they can afford an accountant who knows how to avoid it.

Instead, the research suggests that because of the runaway housing market, many families with modest incomes' one big asset - their house - could end up copping inheritance tax at 40%.

The research was carried out for Five Live by Professor Steve Wilcox, a respected authority on housing finance at the Centre for Housing Policy in York.

He says it is wrong to think raising stamp duty is an effective way to cool the housing market.

Moving costs

He says: "Stamp duty is a tax on mobility, that penalises households that move more frequently."

Moving house could carry hidden costs

Families determined to avoid inheritance tax can reduce their liability by taking advantage of rules exempting inheritance by married partners.

On the death of the first partner a share of the ownership can be passed in trust to any sons and daughters, with the other share passing to the partner.

On the death of the second partner the second share is passed on to the sons and daughters.

This approach potentially doubles the value of the dwelling that can be passed on to sons and daughters without having to pay inheritance tax.

"It remains to be seen whether the growth in potential liability for inheritance tax based on home ownership will in turn lead to wills being revised to take advantage of these provisions," said Professor Wilcox.