A high price to pay for falling into tax trap

Inheritance tax used to be the concern of a select few. But today more and more ordinary’ people face being ensnared by this wealth tax, as personal finance writer ADAM AIKEN reports.

An increasing number of people need to wake up and take steps to minimise the impact of Britain's inheritance tax (IHT) trap, with new figures revealing that more and more people are being affected.

According to recent research by Scottish Widows, four in 10 households now have estates liable for 40pc tax bills in the event of death, up from a third a year ago.

Once regarded as a tax on rich children affecting only a wealthy minority, IHT now applies to an estimated 10 million 'ordinary' families in Britain - fuelled by rising house prices and higher standards of living.

Next month the IHT threshold will rise to £300,000, but the financial services industry and opposition parties have been calling for some time for the threshold to be raised significantly further.

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The massive increase in the number of people potentially affected by IHT has in large part been fuelled by the surge in property prices over the past decade.

According to Darren Linthwaite, a wills and probate expert at law firm Butcher Andrews, which has offices in Fakenham and Holt, married couples should make tax-efficient wills to help minimise their liabilities.

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“Where married couples have assets in excess of £300,000, few realise that if they leave a simple will leaving all their estate to the survivor and then to their children, IHT will be payable on the second death - a sum that could well have been avoided had the wills been appropriately drafted,” he said.

“Both husband and wife will soon have the ability to leave up to £300,000 effectively tax-free and, where the combined estate is significantly in excess of £300,000, they must take steps to preserve the amount which could have been left tax-free on the first death.

“In a tax-efficient will, the first spouse to die leaves the maximum tax-free sum to what is called a 'discretionary trust', of which the survivor is also a beneficiary (see case study).

“Even if the widow or widower has to sell the house, the trust's share of any property can either be separately invested or reinvested in any new property being purchased.”

Matthew Moyes, of independent financial advisers Edward Jones, based in Norwich, echoed this advice.

“Many people don't realise how much their estate can amount to once everything is taken into account - house, car, possessions, business interests, savings, shares, jewellery and so on,” he said.

“It's very easy for an estate to be worth a lot more than the IHT threshold, with tax charged at 40pc on everything above this limit.

“So, for example, an estate worth £500,000 would leave a tax liability on the balance of £200,000, meaning £80,000 would have to be paid before the estate was released to beneficiaries.”

Mr Moyes added: “It's also wrong to assume on death everything passes to ones nearest and dearest. This is often simply not the case.

“But interests can easily be safeguarded by making a will and taking advice. It is simple, inexpensive and can also help limit any IHT liability.”

According to the Scottish Widows research, four in 10 people who intend to take, or have already taken, steps to reduce their IHT bills have looked at the option of discretionary will trusts or life assurance policies written under trust.

Meanwhile, Scottish Widows has estimated that Britons are planning on giving away £103bn (an average of £86,000 per household) to friends and family to avoid huge tax bills on their deaths.

Anne Young, a tax expert at Scottish Widows, said: “IHT is a tax that affects almost half of the country, and it is really important that people prepare for the possibility of leaving huge tax bills on their deaths.

“Gifting is becoming an increasingly recognised way to avoid IHT, but people should remember that few gifts are totally exempt.

“You can give £250 away to an unlimited number of people as well as up to £3,000 each tax year - these will all be exempt.

“In addition, if you live for seven years after making any other absolute gift, this will be exempt, too.”


One way to avoid or reduce IHT bills is via tax-efficient wills.

Simon and Jane have a house worth £300,000, with savings of £150,000 and general possessions worth £20,000, making their estate worth £470,000.

If they have conventional wills, Simon's half-share of the estate (£235,000) will pass to Jane tax-free when he dies. But when Jane dies a few years later, her estate will be liable to pay IHT of £68,000.

That is because the value of her estate (£470,000) less the IHT allowance (£300,000*) leaves a taxable sum of £170,000, and 40pc of £170,000 is £68,000.

However, by using tax-efficient wills, when Simon dies, his £235,000 is left to a trust, which then 'lends' Jane the money. And when Jane dies, the money she has 'borrowed' from the trust does not form part of her estate, so she is not liable for IHT as it will fall beneath the £300,000 threshold.

*The IHT threshold is currently £285,000 but will rise to £300,000 next month.

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