The inheritance tax trap and what you can do about it

You may not be planning to die just yet, but that's no excuse for pleading ignorance of inheritance tax (IHT), arguably one of the most unfair wealth-snatching weapons at the Chancellor's disposal. Yet, astonishingly, 6 out of 10 (62%) or 15.7 million homeowners say they have no idea what the current IHT threshold is, according to research by Scottish Widows.

The threshold currently stands at £285,000, having been increased by a meagre 3.6% last April although house prices have risen by over 6% in the past year. It is estimated that 5.3 million people's property value alone pushes them well into IHT territory, where they are exposed to a 40% tax attack by the Government.

Do remember it's not just the value of your home that counts towards your taxable estate. There's also the value of contents and personal effects, vehicles and other owned properties, investments, ISAs and other savings, as well as life insurance and pension plans not written in trust.

The Scottish Widows IHT index reveals that a further 5 million people are liable for inheritance tax when total household wealth is assessed. Thus, in the event of death, a total of 4 in 10 or over 10 million households are liable for a 40% tax bill on everything of value above £285,000.

The increase in property prices means that thousands more people now potentially face an inheritance tax bill this year compared to 2005. Research by Stroud & Swindon Building Society suggests that by 2014 all average-price homes could be liable to IHT (assuming house prices continue to rise) if the IHT threshold grows as slowly as it has done over the past 10 years.

Will you fall into the IHT trap?

Don't be among the 4 in 10 people who are liable yet have taken no steps to reduce the amount payable. If you're a homeowner you are never too young to worry about this liability, although 1 in 4 believe they are. Perhaps their minds would be more focused if they had dependants; the main reason cited for taking steps to mitigate IHT liability is to leave more of the estate to dependants.

The most popular actions people take are:

• making a will (62%);
• setting up a trust (32%);
• visiting a financial adviser (28%);
• changing home ownership status (28%);
• and giving away money (23%).

29 November 2006 © Moneyextra.com

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