Estate planning

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By Sarah Modlock

Albert Einstein is quoted as saying 'The hardest thing in the world to understand is income tax.' In that case he would have been completely stumped by inheritance tax. As we all are.

So let's get this straight. We work hard and pay taxes on the money we earn. We get tax relief on the money we pay into our pension but then have tax deducted before it is given back to us. Finally, much of the taxed money we save and invest is taxed again when we die. What's wrong with this picture?

The sad truth

Inheritance tax - or IHT - currently affects estates which are valued at more than £285,000. A person's estate includes the value of their house and because of the way house prices have risen in recent years, the property can easily account for the lion's share of the £285,000 limit without much difficulty.

Figures from the Halifax show that the average price of a detached property is above the IHT threshold of £285,000 in London (£640,499) and the South East (£403,758). The average London semi costs £362,485 with terraces at £335,456 and bungalows at £304,659. One third of detached property sales in the UK were above the 2006/07 IHT threshold of £285,000 last year.

Sales above the inheritance tax threshold accounted for at least 25% of detached house transactions in 38 (36%) counties in 2005. 20 of these were in Southern England. However, Scotland accounted for 6 of the total, while 5 were in the West Midlands and four in Wales.

But the total amount of tax that must be paid by the estate depends not only on the value of the estate when they die - but also on the value of gifts given in the previous seven years. Although some are exempt from IHT, many others are not - and attract IHT on a sliding scale depending on how long ago they were given. Exemptions include gifts of up to £250 per person per year, as well as wedding gifts of up to £5,000 for your children or to anyone else of up to £1,000, plus all gifts to political parties (ahem) and charities. Of course, with professional help, there are ways to limit your liability through planning and trusts.

The fact remains that the number of people who have been forced to pay inheritance tax has more than doubled since 1997, leading to charges that the government has used it as a stealth tax. Surely not, I hear you cry. Some 37,000 people paid the tax last year, up from 18,000 in the year Labour came to power, according to government figures.

The rub

Earlier this month, former Labour cabinet minister Stephen Byers called for inheritance tax to be scrapped, saying it is 'a penalty on hard work, thrift and enterprise'. He challenged 'Mr Blair's successor to show that they are in touch with the British people'. Talk about ambitious. He warned that soaring house prices threatened to bring millions more within the scope of inheritance tax, which was designed to target the very wealthy rather than ordinary families.

But a Treasury spokesperson said: 'Inheritance tax is a fair and necessary means of raising revenue for public services.' And here's the rub: 'Anyone who wants to abolish it needs to explain exactly how they plan to fund the £3.6bn cost - the equivalent to more than 1p on income tax, or 18p on petrol duty, and almost double what we are spending this year on counter-terrorism and security.'

It seems that the income from IHT is now seen as an absolute right and money which they are clearly relying on to plug other gaps. Isn't that rather like a bank robber telling the police he'll stop if they can provide him with another way to get hold of large lump sums in the future?

A Treasury spokesman who, understandably, remained nameless says '94% of estates would pay 'no inheritance tax whatsoever' as a result of the government's planned adjustment of the threshold' (to £325,000 by 2010). But a study by the Halifax estimates that the number of properties in the UK valued at more than the 2006/07 IHT threshold of £285,000 now stands at 1.5 million, or 8% of all owner-occupied properties. The bank projects this will nearly triple to 4.2 million properties by 2020 if the threshold is only increased in line with retail price inflation (taking into account the planned allowance increase).
Here's what else the Halifax found...

• Over the past five years there has been a 49% increase in IHT revenue.


• IHT revenue was a record £1.7bn in first half of 2006, up £200m or 13% from the first half of 2005. IHT revenue collected in the first half of 2006 matches total IHT revenue collected over the full financial year 1997/98, only eight years ago.


• The number of estates paying IHT rose by 72% over the five years to 2003/04 to 30,451. The Government's own estimates suggest a further 22% increase in the number of estates paying the tax by the end of 2006/07 to 37,000.


• Halifax projects that the revenue collected by the Exchequer from IHT could rise to £5.5 billion a year in today's money by 2020. That is a 244% increase from the £1.6bn the Exchequer received in 1996/97, the last time the IHT threshold was raised significantly.