Inheritance tax warning as over-65s could face £140,000 hit under 'new death tax by the back door'

A 65-year-old homeowner in a £2million property who chooses to defer the new £2,500 annual council-tax surcharge for 15 years until death at 80 would leave behind a bill of £46,692, AJ Bell’s calculations show.

For owners of homes worth more than £5million, the deferred liability climbs to £140,077. The model assumes annual inflation of two per cent.

This bill would sit on top of any inheritance tax owed on the property, as well as the stamp duty already paid when the home was purchased.

The government describes the measure as a high value council tax surcharge, which will apply to properties exceeding £2million in value.

The levy operates on a graduated scale, with charges beginning at £2,500 annually for homes valued between £2million and £2.5million, increasing to £7,500 for properties worth £5million or above.

The surcharge will be adjusted yearly according to the Consumer Prices Index. Local authorities will collect the levy alongside regular council tax payments, with proceeds directed to central government coffers.

Sir Mel Stride, the shadow chancellor, has said the plans amounted to "a new death tax by the back door".

The Treasury has indicated that a consultation process will commence in early 2026 to establish details regarding reliefs and exemptions.

The government has pledged to implement a support scheme for homeowners who may struggle with the charges.

The deferral mechanism is designed to assist those living in valuable properties but lacking immediate funds, particularly pensioners. Under the proposed system, homeowners could postpone the annual charges until they sell their property or pass away.

Tax experts warn that deferred payments would likely attract substantial interest charges. Peter Graham from accountancy firm RSM stated: "HM Revenue & Customs hardly ever gives a deferral of tax without charging some level of interest, and this could make the final payment very expensive for someone who does defer."

HMRC's standard late payment charge formula adds four percentage points to the Bank of England base rate, currently resulting in an eight per cent annual charge. This calculation method applies to various taxes including income tax, VAT, stamp duty and inheritance tax.

The Office for Budget Responsibility's costings for the council tax surcharge anticipated the introduction of a deferral scheme for those unable to pay immediately. Approximately 155,000 residences in England currently exceed the £2million threshold.

Telegraph analysis indicates an additional 30,000 homeowners will become liable for the levy by 2028 due to property value increases.

Aneisha Beveridge from estate agency Hamptons noted: "Allowing pensioners to defer the surcharge could ease short-term pressure, but it does raise questions about how these bills will be settled later."

She added: "In reality, it would take over a decade for the bill to reach six figures, and for homes worth £5m or more, that's only around 2pc of the property's value."

The measure has drawn sharp criticism from financial experts who warn it could become a revenue generator for the Treasury at the expense of vulnerable homeowners.

Former pensions minister Ros Altmann expressed concern about the impact on elderly residents: "If they do use a deferral system, it would be a lovely money-spinner for the Treasury but terrible for those hit by it.

"These are likely to be older people for whom selling would be hard and haven't got the cash to pay the tax."

Heather Powell from accountancy firm Blick Rothenberg cautioned: "If this deferral rolls on for ten years, that's going to be really expensive. I think if there is an eight per cent interest, most people won't want to go down the deferral route because that is very expensive borrowing."