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Inheritance tax and stamp duty

publication date: Sep 17, 2007
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Inheritance tax and Stamp Duty Receipts from residential property have increased dramatically during the past 10 years because tax rate thresholds have failed to take account of house price growth, according to Savills research.

Whereas house prices in England and Wales have grown by just under 180% in the past 10 years, Savills estimate that stamp duty on property is now 10 times the figure of 1996, whilst 2006 inheritance tax receipts for residential property are estimated to be five times the 1996 tax take.

The massive growth in stamp duty can in part be explained by the change in the charging structure introduced between 1997 and 2000 but, irrespective of this, receipts in the past five years have grown well in excess of house price growth during which time stamp duty rates have remained unchanged.

However, the failure to raise the nil rate band for inheritance tax produces the most startling results, with 180% growth in the past five years compared to house price growth of 80% in the same period. Even, assuming that an individual’s nil rate band is offset entirely against the equity which individuals hold in their property, residential property in England and Wales is now estimated to account for 40% of all inheritance tax, up from 19% in 1996 and 32% in 2001. 85% of this property is occupied by owners as their main house.

Tax Take by Reference to House Value (2006 Prices)

In terms of numbers of households, Savills research estimates that in 1996, there was enough equity in 300,000 homes to make them potentially liable to inheritance tax. In 2001 this number had increased to 520,000 and last year it stood at 1.4million homes. “The burden of the increase in inheritance tax is increasingly being shouldered by middle England,” according to Lucian Cook director of Savills residential research.

“Houses worth £400,000 or less in 2006 are estimated to generate approximately 16% of inheritance tax revenue from residential property. In 2001 they would not have contributed to the Chancellor’s pot.”

The research which is based on Land Registry data and Government statistics relating to household demographics and their relationship with house ownership, suggests that the effective rate of inheritance tax on all residential property held at death has more than doubled over the past ten years.

Lucian Cook concluded “We expect the fact that more properties are potentially subject to inheritance tax to result in increased sales. For some families a sale will be needed to raise proceeds to meet the tax liability following a family death, whilst for others it will mean downsizing in retirement to enable lifetime gifts of cash, especially given the clamp down on tax planning schemes for the family home in recent years.”