Are you one of the four-in-ten homeowners with an estate that could be liable to inheritance tax when you die? If so, don't be one of the millions who fails to reduce this tax by planning ahead.
New research from Scottish Widows reveals that almost ten million people in the UK have estates worth above £300,000, which are liable to 40 per cent inheritance tax (IHT) on death. Your estate includes everything owned in your name such as the family home, cars, savings and investments and family heirlooms. The first tax-free £300,000 is known as the nil-rate IHT threshold.
Of those ten million homeowners, almost half fall into the IHT trap because of the value of their house alone which exceeds the nil-rate IHT threshold. This threshold was raised from £285,000 to £300,000 after the March Budget.
"Although the nil-rate IHT threshold has risen to £300,000, our research shows that the number of people that could be affected by this tax still remains artificially high due to increasing house prices and wealth," says Anne Young, tax expert at Scottish Widows.
"The recent announcement from the Chancellor in the Budget seemed to be a sweetener, but raising the threshold to £350,000 by 2010 will still leave many people with a problem if house prices continue to rise at the current rate."
This is good news for the government. The Halifax estimates that over the five years to 2007/8, total cumulative IHT revenue will be £16.4bn - up more than half on the previous five years. If the government had raised the threshold in line with house price inflation since 1995/96, it would now be at £460,000 - more than 50 per cent above the current threshold.
"The thresholds at which inheritance tax are levied have lagged well behind the increase in house prices over the past decade," says Tim Crawford, group economist at the Halifax.
The Treasury recently argued that no previous administration has ever linked tax thresholds to price movements of a particular asset - in this case housing - and this government is no different.
This is no comfort to those facing such a punitive tax which is no longer a tax only on the wealthy as it used to be. Not surprisingly, many financial experts and business analysts are calling for a re-duced tax on inheritance.
Others go further; the Institute of Directors has called for its complete abolition and claims it deters saving. "Inheritance tax is now a tax on the thrift and financial inde-pendence of ordinary working people," says Miles Templeman, director general of the institute. "It is time for it to be abolished."
He claims the government could make up the amount lost on scrapping IHT by simplifying the current sys-tem for capital gains tax - a tax on the profits made from investment.
For the time being, though, IHT is here to stay. But there are several things you can do to reduce its impact on you and your family. Scottish Widows lays out the most popular actions people take to reduce or avoid IHT.
Making a will (62 per cent) Setting up a trust (32 per cent) Visiting a financial adviser (28 per cent) Changing joint ownership of the home to tenants in common (28 per cent) Giving away money (23 per cent) "People need to add up the value of their assets and do a rough calculation to see if they have a potential problem when they die," says Anne Young from Scottish Widows. "The best advice I can give anyone is to ensure they at least write a will, so that their relatives benefit in the way that they would want."
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