BY THE time of the next election, expected in 2009, rising property prices will have pushed two million more people into the inheritance tax (IHT) bracket over this decade.

A report published today by Lombard Street Research and Grant Thornton, the accountant, forecasts that the number of people whose estates would potentially be liable for IHT will rise from

1.6 million in 1999 to 3.6 million in 2009. The number where death triggers an actual IHT payment is set to more than double from 18,000 in 1999 to more than 45,000, while the amount paid nearly trebles to £5.2 billion.

Mike Warburton, senior tax partner at Grant Thornton, says: “Our research shows that there will be a huge jump in IHT receipts over the next few years. By the next election an awful lot more people will be worrying about this tax. Those who will suffer will be the people of Middle England, not the very wealthy who can give away a large part of their fortune in advance and thus avoid IHT.”

The study shows that the key factor in trapping more people in the IHT net has been the Chancellor’s refusal to lift the threshold in line with soaring property prices since Labour came to power in 1997. Instead, he has limited rises in the threshold to the much more modest increase in inflation.

Between 1997-98 and this year, average house prices rose by 142 per cent. The IHT threshold, meanwhile, went up by only 28 per cent. The result has been that receipts from the tax have more than doubled to a projected £3.4 billion in the current tax year. If the threshold had been raised in line with property prices since May 1997, it would now stand at more than £500,000.

However, Gordon Brown shows no sign of wanting to catch up to this sort of level. He has already announced that the current threshold of £275,000 will rise to £285,000 in 2006-07 and to £300,000 in 2007-08 — increases of only 3.6 per cent and 5.2 per cent respectively.

The cost of abolishing IHT could be met by any one of the following measures: an extra 1 per cent on the basic rate of income tax, an additional

0.5 per cent on employers’ and employees’ national insurance contributions or a 1 per cent increase to VAT.

However, authors of the report say that any of these would be politically unpopular and unlikely to be carried out by a Labour or Conservative government, even though both pledged to tackle IHT in the 1990s. The Conservatives promised to abolish the tax in 1996 and Labour, while in opposition in 1994, issued a paper that said: “At present, while the very wealthy avoid the tax, many others are being drawn into it.”

However, today’s report adds: “Since Labour came to power, IHT remains one of the few areas to receive relatively little attention.”

If, as the study suggests, many more people will be worrying about IHT at the next election, the impact will be felt especially heavily in London and the South East. A study by Halifax, the mortgage bank, shows that more than one in three constituencies in the region already have an average property price that is above the IHT threshold. In 1999 the figure was one in 20.

Mr Warburton says: “People are understandably becoming more worried about this tax, but our study shows that if they think things are bad now, they are going to get a whole lot worse in the future.”