Around 20,000 families will pay £95,000 more in tax by 2019 as Osborne freezes inheritance threshold,

Thousands more families will be dragged into the 40 per cent inheritance tax (IHT) band in the coming years after Chancellor George Osborne decided to freeze the tax-free £325,000 threshold until 2019.

The freeze - which reverses a previous Conservative policy to dramatically increase the threshold - means many more estates will become subject to the tax as asset prices, and property prices in particular, continue to rise.

When someone dies, IHT is paid on any amount over £325,000 they leave behind - so someone with assets worth £500,000 would pay 40 per cent on £175,000 (£70,000).

Enlarge   Tax trap: The IHT threshold has been the same since 2009 - if it had increased in line with RPI it would be around £358,000 for the 2013 tax year

The level from which the tax is paid has been the subject of much anger from middle-earners who complain that rapid property price rises in the past two decades have dramatically increased the value of estates. They say that those with relatively modest levels of wealth are now subject to a tax that was originally designed to hit just the wealthiest.

In 2007 the Conservatives, then in opposition, pledged to raise the IHT threshold to £1million.

The policy was popular with voters and later that year the Labour Government moved to make IHT rules more generous. They ruled that married couples would be able to transfer the nil-rate band if one of them died to the surviving spouse without the need for special planning.

Effectively a spouse’s IHT threshold is automatically transferred to the survivor on death. So a widow or widower with a £750,000 estate would enjoy a nil-rate band on the first £650,000, and pay tax on just £100,000 - an IHT charge of £40,000.

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As recently as two months ago Mr Osborne suggested he would be raising the threshold in April 2015 in line with inflation so that, relatively speaking, the numbers forced to pay it would remain stable.

But the Chancellor today confirmed the threshold is to be frozen at £325,000 until 2019, when it will rise to £329,000. The measure will help fund the new £75,000 cap on care home bills for the elderly, the Government said.

As a result, an estimated 5,000 more families a year are expected to be pulled into the tax trap. It will increase IHT bills by an average £95,000 compared to what they would have been had the allowance had been increased as planned.

The IHT threshold has been the same since 2009. If it had increased by RPI it would be around £358,000 in 2013/14. If the threshold increased in line with inflation every year until 2019 it would be expected to reach £420,000.

Bonus: In 2007 the Labour Government ruled that married couples would be able to transfer the nil-rate band if one of them died to the surviving spouse

The money is taken directly from the estate of the deceased, thereby lowering the value of the inheritance their kin eventually receive.

Other assets taken into account when valuing a persons estate include investments such as stocks and , savings, furniture, vehicles, pensions that include a lump sum payment on death, payouts from life insurance policies and foreign assets held abroad.

The care reforms which the IHT freeze will help fund are expected to cost £1billion a year. Some 80 per cent of this will come from increased employer national insurance contributions – mainly in the public sector – as a flat-rate state pension replaces the state second pension.

But the remaining 20 per cent will come from the inheritance ‘stealth tax’.

A Government source said: ‘The result of the social care reforms will be that 100,000 people who would have had to pay will be helped. The inheritance tax allowance has been frozen since 2009, but it’s also been made transferable so a couple now has a threshold of £650,000.'

'Yes, it will bring 5,000 more people into inheritance tax but it will help more than 100,000 who currently suffer for daring to do the right thing and saving for retirement. Those who have worked and saved all their life and bought a property won’t have it taken away just because they did the right thing. That’s only fair. We are going to protect their inheritance.’

However, Conservative MPs expressed alarm.

Right-winger Peter Bone said: ‘It starts to look as if we are giving with one hand and taking away with the other.’

And Neil Duncan-Jordan, from the National Pensioners’ Convention, said he could see little difference between the freezing of the inheritance tax threshold and Labour’s plan before the election for a ‘death tax’ to pay for care.

Ros Altmann, a former adviser to the Treasury on pensions, said relatively  well-off pensioners with expensive houses – particularly in the South-East – would be hit by the inheritance tax changes.

‘Many people who end up not needing any expensive care in their old age will end up paying lots of inheritance tax to those who do,’ she added.

To avoid paying IHT many people will try and reduce the value of their estate by various means. This normally means giving money away, but alternatively there are certain investments that become IHT free after 2 years. Qualifying AIM shares is one, and Enterprise Investment Schemes are another. Both tend to be higher risk than most stock market investments, and therefore are not for everyone.

John Williams, managing partner at EIS Investment Platform Kuber Ventures, said: 'Thousands more people will now be caught by IHT and must now find other means to limit the amount taken from their estate. With the end of the tax year fast approaching, it is even more important that people now re-evaluate their IHT efficiency.

'One way of avoiding paying excess IHT is to ring fence your money within an EIS portfolio. After a period of two years, the value of any EIS investment will be outside that person's estate, therefore after death, beneficiaries will receive 100 per cent of the return. This is known as Business Property Relief.'

'On realisation of EIS shares, the proceeds will fall back in to the investor's taxable estate, but they can re-invest within a three year period and qualify immediately for IHT relief.'

Matthew Stephens, inheritance tax expert at Prudential, said: 'Plans to freeze the inheritance tax threshold until at least 2019 mean that many people could potentially face a sizeable tax bill if they do not plan ahead, which is why seeking early advice from a financial adviser or retirement specialist is vital to ensure it’s possible both to leave an inheritance and secure a comfortable retirement income.'