Time to start inheritance tax planning

UK house price inflation and increasing personal wealth are sucking more and more estates into the inheritance tax (IHT) net, warns financial research company Defaqto.

In fact, 9.4 million individuals can expect to have an inheritance tax liability by the time they die, according to Scottish Widows research.

UK residents are liable to pay inheritance tax at 40 per cent on their total worldwide assets, including the value of their property, which is in excess of £300,000 (the portion of your estate which is inheritance tax free in the 2007-08 tax year).

Figures from the Office of National Statistics show that 4.8 million Brits have homes worth more than £300,000, while another 4.5 million are liable to pay IHT when their personal wealth is taken into account.

Even though the inheritance tax threshold is raised each year in line with inflation, this has not kept pace with UK house price inflation which has increased by 189 per cent over the last 10 years.

Halifax statistics show that in the second quarter of 2007 the average price of a property in the UK rose to £196,535, while the average price of a home in Greater London jumped to £313,122.

Had the IHT nil rate band increased in line with property price inflation since 1997, the threshold would now stand at £513,850, according to Land Registry figures.

Despite calls for inheritance tax to be scrapped, the Treasury is unlikely to relinquish a tax which raised £3.1bn in 2005, £3.5bn in 2006, and is expected to bring in £4.1bn in 2007-08.

But inheritance tax is often dubbed ‘the voluntary tax,’ because there are numerous ways in which you can reduce a potential IHT liability with relative ease, by making use of:

exempted gifts to family and friends,
tax free donations to charities, political parties and national institutions,
various schemes using trusts,
equity release,
mirror wills, and
term and whole of life assurance policies.

However, the taxation of transfers of lifetime gifts into certain types of trust changed in the 2006 Budget, making such gifts potentially liable to three tax charges, so anyone planning to use trust-based schemes should take professional tax and financial advice.

Kate Marsden, marketing director at Defaqto, says: “As UK house prices continue to outstrip rises in the inheritance tax threshold, more and more households are falling into the inheritance tax net.

“Advance tax planning is essential if individuals bequeathing assets to their heirs want to reduce the potential inheritance tax bill their beneficiaries will face. Writing a will is a good place to start.”