Growing tax timebomb for middle Britain as house prices rise

Middle Britain faces a growing tax timebomb as rising house prices threaten to push ordinary families into the inheritance tax trap within just ten years.

Analysis suggests the typical UK home will be worth more than the current inheritance tax (IHT) threshold of £325,000 by 2035 - a threshold that hasn't budged in over a decade and is frozen until at least 2030.

The freeze, initially introduced by Jeremy Hunt and extended by Labour's Rachel Reeves, is being blamed for dragging more bereaved families into the tax net every year - despite no change in legislation.

New figures from the Treasury reveal that the Government collected a record £8.2 billion in death duties between April 2024 and March - up £750 million on the previous year.

Investment platform Wealthify, which analysed Land Registry data, found that average house prices have soared from £138,626 in 2005 to £268,319 this year - and are on track to breach the IHT threshold by 2035 unless the limit is raised.

Simon Holland of Wealthify warned: "Our research shows that four in five parents are becoming increasingly concerned with the amount of inheritance tax bereaved families are paying, driving a growing trend in people looking at how to pass on money to their loved ones in a tax-efficient way.

"If you are relatively young, healthy, and are financially able to do so, you might want to consider leaving your children a chunk of inheritance while you're still here."

Inheritance tax is levied at a punishing 40% on assets above £325,000 - though an extra £175,000 allowance applies if a main home is left to direct descendants. But even this "residence nil-rate band" is frozen, pushing more families with modest homes into the danger zone.

Analysis by AJ Bell shows that a married couple with £1 million in assets - including a family home - could face an extra £233,560 in tax because of the freeze.

Charlene Young, a pensions and savings expert at AJ Bell, told the : "Frozen tax thresholds punish taxpayers by stealth. When asset prices rise but thresholds fail to track inflation, the result is higher tax bills.

"Astonishingly, the main inheritance tax-free threshold won't have changed in over two decades by the time the freeze is lifted in 2030."

The Treasury's own spending watchdog, the Office for Budget Responsibility, predicts that by 2030 nearly 10% of estates will be liable for inheritance tax - more than double the 4% currently caught.

And in a move that will hit retirees, Ms Reeves also announced that from 2027, unused pension pots will be subject to IHT - a dramatic reversal of existing rules.

Ms Young warned: "The impact of the frozen bands will be turbo-charged if the taxman is also allowed to take a slice of unused pensions on death.

"If the changes are implemented as originally proposed for deaths from April 2027, the Exchequer might well overshoot its own impact assessment on the impact of the two-year extension to the inheritance tax band freeze by the time it comes to an end."

Faced with rising bills, some parents are taking pre-emptive action. Several told The Telegraph they were making early financial gifts to their children to help with house deposits - a tactic that can avoid IHT if the giver survives seven years.

Each individual can also give up to £3,000 a year tax-free under current rules - a figure unchanged since the 1980s.

However, experts warn families must keep detailed records of any gifts. HMRC opened 3,961 investigations into underpaid inheritance tax last year - up 31% on the previous year. In total, nearly 10,000 cases have been opened in just three years, with 2,606 still ongoing.

A Treasury spokesman said: "This assumes inheritance tax policy in a decade's time. Decisions on this tax policy will be made then."