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Families to pay an extra £900m inheritance tax by 2022

Amelia Murray
Increased property prices, higher mortality rates, and the anticipation of higher probate fees are all contributing factors to the Government's revised inheritance tax figures - © 2017 Bloomberg Finance LP

Official figures show £900m more inheritance tax is expected to be collected over the next five years than was previously expected, according to documents published alongside yesterday's Budget.

In March the Office for Budget Responsibility suggested £32.4bn of inheritance tax would be paid between 2016 and 2022.

It has now revised that figure up by almost £1bn. The main cause is that more people are dying each year than previously projected - but other factors include rising house prices and tougher enforcement by HMRC, accountants say.

"Population projections have boosted receipts, reflecting higher expected mortality rates," the OBR said in a note within its 259-page Economic and fiscal outlook.

The largest discrepancy applies to the current 2017-18 tax year, where receipts are expected to come in at £5.3bn rather than the £5bn estimate published in March.

The OBR also expects an extra £200m inheritance tax to be raised in each of the next two tax years  2018-19 and 2019-20.

The gap between the figures suggested in the previous and current forecast narrows in 2020-21.

Total deaths of those above state pension age now average 502,000 a year, up from 476,000 previously. The ONS figures suggested that by 2022 the population in this age group will be 1.2 per cent lower than previously assumed.

But Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, said there were a number of reasons behind the sharp increase in expected inheritance tax receipts.

She suggested the Government's continued focus on tax avoidance, also highlighted in yesterday's Budget, will see more inheritance tax generated as former loopholes are closed down.

Ms Griffin said rising house prices continued to be a contributing factor.

This, in some cases, could be offset by the additional nil-rate band which enable direct descendants to inherit up to £175,000 from the sale of their family home tax-free by 2020-21. The nil-rate band is currently £100,000 and will increase to £125,000 in 2018-19.

However as the inheritance tax perk only applies to direct descendants, such as children, grandchildren, stepchildren, adopted and foster children, Ms Griffin said many people will end up paying more tax than they think.

Receipts at the start of 2017-18 also  increased because of an anticipated a rise in probate fees. The Government said it expected new rates to increase to between £300 and £20,000 from May 2017. This did not take place in the end, and the next move remains undecided.