And a new inheritance tax grab will mean even more people will become higher-rate taxpayers for the first time on death duties. As many as 10,000 bereaved relatives already face demands for an extra £1billion after payment thresholds were frozen until 2025/26 by Prime Minister Rishi Sunak when he was chancellor.
But last week Chancellor Jeremy Hunt extended the freezing until 2027/28. This will see £42.1billion of inheritance tax (IHT) flow into the Treasury over six years.
The figures will rise from £6.7billion this financial year to a record £7.8billion in six years’ time. If property values increase at the levels expected, many more estates will be liable to pay the tax.
IHT is due at 40 percent on the amount of every estate above a valuation of £325,000.
This includes savings, investments, properties and possessions such as jewellery, cars and art.
The result will be that grieving families fork out collectively £1billion extra in IHT in 2026-27 and 2027-28, according to calculations by wealth manager Quilter.
This is because of a “fiscal drag” where by inflation and earnings growth push more taxpayers into higher tax brackets.
Investment service Wealth Club worked out that this means the average IHT bill will soar from £216,000 in 2019-20 to £297,793 in 2025-26 and then again to £336,605 for 2027-28 due to the impact of frozen thresholds combined with rising inflation.
Alex Davies, pictured far right, from Wealth Club, said: “Freezing the inheritance tax threshold for an additional two years is a tax increase on the sly.
“It won’t appear on a list of tax increases but it will not be too long before its impact is felt. It’s not just going to be the super-rich, it will be the thousands of hard-working families caught in the cross hairs of high property prices and frozen IHT allowances.”
Steve Wilkie, of the equity release firm Responsible Life, said: “Inheritance tax is a regressive cash cow that grows harder to defend by the year.
“This fiscal dragnet presents increasing numbers of retirees with an impossible choice between their own financial security and the ability to pass on to loved ones the wealth on which tax has already been paid.
The IHT threshold has been frozen for so long now that people have grown used to it but stealth tax rises like this should be called out for what they are.”
Mr Wilkie added: “Instead, Britain needs a progressive tax policy that is as transparent as it is fair and which doesn’t mean the older generation continues to be punished for financial prudence.”
Calculations from tax firm RSM show that 10,000 more families could end up paying IHT during those two years as a result of the thresholds not rising with inflation. The nil-rate band – the amount that can be passed on before IHT is due on the estate – has been stuck at £325,000 since April 2009.
Extending the freeze until 2027-28 means this will have been unchanged for almost 20 years – despite soaring house prices pushing many estates above the threshold.
Average house prices have risen by £140,000 between 2009 and 2022, according to data from HM Land Registry. The residential nil-rate band, introduced in 2017 to account for house prices increasing the size of estates, has also been frozen at £175,000.
Quilter estimates that, if this had risen in line with inflation, the nil-rate band would be worth £351,520 in 2027-28 with the residence band worth £189,280.
This would see fewer families caught in the tax trap because an average couple would have £80,000 more in allowances.
In 2009, only 2.7 percent of estates paid death duties. But this has jumped to close to four percent.
In 2019-20, the latest year for which data exists, 23,000 families paid death duties.
Andrew Tully, of financial services provider Canada Life, said: “While IHT has historically been a tax of the very wealthy, this is clearly no longer the case.
“This is now a concern for larger sections of society as the IHT tax net widens.”
Even with house prices expected to fall, Quilter’s Shaun Moore does not expect this to impact the number of estates caught in the IHT net.
He said: “While house prices may soon cool due to the list of financial concerns facing the UK – such as inflation, energy prices and a European war – this is unlikely to take the sting out of IHT bills for some time.”
James Ward, of Kingsley Napley LLP, said: “IHT is regarded by some as a double taxation given people already pay income tax during their lifetime and is often described as one of the most hated taxes.”
The Treasury said: “We do not comment on speculation around tax changes.”