Government policy has worked against home owners leaving them more than £10bn a year worse off than they were in 1994, the Council of Mortgage Lenders has concluded.

Twelve years ago, tax relief on mortgage interest and income support paid to home owners outweighed their stamp duty and inheritance tax liabilities leaving them net 'gainers' from the Government to the tune of £2.6bn, according to an article published in CML's relaunched electronic newsletter. ‘By 2004/2005, however, tax relief on mortgage interest had been abolished and the amount home owners paid in stamp duty and IHT had risen so steeply that it dwarfed the small amount they received in income support by £7.5bn’.

Although figures on the exact amount of IHT paid on property are not available, CML estimates the amount of tax paid on residential property has more than doubled in the last 10 years and now accounts for at least 35 per cent of all inheritance tax revenue.

‘The amount of tax paid on people's estates - across all assets, not just property - has more than doubled from £1.4bn to £2.9bn in the 10 years to 2005’, said CML. ‘The reason for the strong rise in the amount of IHT paid on residential property is the failure to index allowances in line with house price inflation. If the 1997 IHT threshold of £215,000 had been increased to reflect house price inflation, it would now stand at more than £500,000 instead of its current level of £275,000’.

Without a change in policy, there is likely to be a further dramatic rise in the number of estates liable for IHT in the next few years, the article predicts. Since 2000, the value of residential property in estates worth more than £200,000 has trebled from less than £4bn to around £12bn. One estimate suggests that the number of people potentially liable for IHT could rise by two thirds to 3.6m by 2009.

‘The failure to index thresholds for both inheritance tax and stamp duty means that the tax burden on home owners has grown significantly in recent years’, said CML head of research Bob Pannell. ‘This sits oddly with the Government's stated goal of extending home ownership to three-quarters of the population.

‘One of the iniquities of inheritance tax is that the Government is taxing growing numbers of home owners at 40 per cent when they die even when they have never been higher rate taxpayers during their lifetime’.