Six million homeowners face inheritance tax timebomb

Millions of homeowners face a tax timebomb unless the government changes inheritance tax laws, according to research carried out for The Observer.

Within 20 years one in three homeowners will have tax deducted at 40 per cent from their estate when they die, according to the study by the Halifax, Britain's biggest mortgage lender.

The number of homeowners potentially liable to inheritance tax is likely to rise from 2.4 million now to 4 million by 2015 and 6 million in 20 years.

The tax has spread as house price inflation has far outpaced the rate at which the tax-free inheritance threshold - currently £263,000 - is set. The Royal Institution of Chartered Surveyors (RICS) and the Council of Mortgage Lenders are urging the government to link the threshold to house price inflation. If this had been done since 1993, it would now be £359,000.

Although middle England is starting to protest at the effect of inheritance tax (IHT), there are few signs that the government is listening. 'I don't think they will change their stance on this - given the budgetary pressures they are under,' said Milan Khatri, head of economics at the RICS. 'The government is using the easiest route possible to increase the tax take without putting up tax rates.'

John Whiting, of PricewaterhouseCoopers, formerly president of the Chartered Institute of Taxation, said: 'IHT isn't doing what it was originally designed to do - get at the wealthy and redistribute. It is increasingly affecting Mr, Mrs and Ms Average.' He would like to see a review of the tax take place, rather than letting it increase its scope 'by accident'.

People dying in Gerrards Cross, Bucks - the town with the most expensive houses in Britain - would leave an IHT bill of £145,000 on today's average property prices if they died now.

But there are 85 other towns where the average property price is above the threshold.

Paying the bills can create practical problems for children and others who inherit. The worst arise when the house is the only asset and must be sold to pay the tax. Although IHT bills can be paid in instalments over 10 years, the full bill must be paid immediately if the asset is sold.