A way to avoid paying inheritance tax on property may be
short lived if the Chancellor Gordon Brown changes the concessions.
With the Halifax reporting that that 1.4
million, or 9% of English properties, are now valued at more than
the current inheritance tax threshold of £285,000, avoiding this
much disliked tax is becoming a priority for many homeowners.
Halifax predicts that the number of
English properties potentially liable for IHT will more than double
to 20% or 3.5 million properties by 2020 if the threshold is only
increased in line with retail price inflation.
And with Gordon Brown edging ever
closer to number 10, there is little likelihood of any relief for
homeowners in the IHT area. Since entering office nine years ago,
the Chancellor has seen an 89% increase in IHT income and is
expected to pocket around £3.6 billion during the 2006-2007
financial year.
Despite his insistence that few
people will be liable for IHT on their estates when they die, the
number of estates liable for inheritance tax has risen from 15,000
in 1997 to an expected 37,000 for this year.
'A property boom has coincided with
the chancellor's time in office,' said Howard Burns, partner at
national law firm Rowe Cohen. 'Alongside this, there has been no
balance between IHT thresholds and rises in inflation, which has
caused the thresholds to get seriously left behind. In effect,
people's wealth has increased, but no change to IHT allowances has
been made for this.'
Over the past 10 years, house prices
have risen by 179%, while the IHT nil rate band threshold (the
maximum amount you can leave before your estate becomes liable to
tax) has risen by 89% and currently stands at £285,000.
'Although £285,000 sounds like a lot
of money, many people do not realise how easy it is for their estate
to quickly creep past this amount. Inheritance and life insurance
payouts received upon the death of a spouse, civil partner or
parent, rocketing house prices and forgotten savings can all push
estates significantly into the 40% tax zone,' Burns warned.
Wills can protect or mitigate against
unnecessary levels of IHT, but Burns explains wills of this kind
have to be carefully tailored to suit the individual's estate to
properly utilise the nil rate band allowance. 'If your property is
your main asset, an IOU Discretionary Will Trust should be
considered - these remain unaffected by Brown's taxation of trusts
announced in his last budget,' Burns said.
This allows you to create a debt
against your estate and with the agreement of the trustees, the
surviving spouse or civil partner is allowed to have full use of the
assets including the family home during their lifetime.
Upon the second death, the value of
the IOU is set-off against the estate of the second spouse or
partner to die, and the nil rate band allowance applied, before IHT
is calculated on the remainder. It is usually appropriate to change
the ownership of the house from joint tenants to tenants in common
to do this.
To mitigate IHT, Burns advises that
people reassess their wills and the distribution of their estate. 'A
deed of variation can allow a deceased person's will to be
re-written so that the deceased's estate is redirected, as long as
it's written within two years of death and agreed by all
beneficiaries,' he pointed out. But there are many experts who
believe that this concession may soon be removed.
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