One day, son, all this could be the taxman's

It's the new national obsession: what can we do to avoid being clobbered by inheritance tax?

Sam Dunn
Sunday 01 October 2006 00:00 BST
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Talk tax at the dinner table and you'll be ignored. Narrow it down to inheritance tax (IHT), though, and the conversation will flow fast and furious.

Thanks partly to the political party conference season and policy reviews - the Conservatives go this week after Labour and the Liberal Democrats - and partly to soaring property prices, concern about IHT is muscling its way into millions of minds.

Many readers have contacted The Independent on Sunday Money desk to express their concern that their estates are now worth a lot more than the current £285,000 threshold (IHT is paid at 40 per cent on anything over this) - and to complain about how unfair it is that they should pay have to pay the tax.

Stuart Mann bought his house in Manchester for "not many thousands of pounds" under the 1980s "right to buy" policy, which let council tenants buy their home at a discount. Today, the value of his property, his only asset, has caught him in the IHT net.

"I really don't know if I'm the sort of person the Government wants to tax, but my family all work hard and now face an IHT bill when I die. The home is all I've got to pass on."

Mr Mann's predicament, like that of hundreds of thousands of others whose home is their only major asset, seemed to have been addressed in one idea leaked last week. It emerged that as part of a review of tax policy, likely to be published next week, the Tories were considering exempting a family's main home from an IHT estate.

It sounded a surefire vote winner, but critics pounced to ask how the party expected to replace the lost tax revenue. The Tories moved to distance themselves from the idea.

Although the Government has no immediate plans to review the way in which IHT is calculated, former ministers including Stephen Byers and Alan Milburn have recently called for either abolition or reform because of its potential to hurt ordinary people financially, and not just the wealthy.

The Liberal Democrats, meanwhile, are moving towards backing a new model known as "accession".

Under this system, it would be the heirs to the estate who are examined for tax purposes, and given an IHT allowance on the legacy- rather than the estate itself.

For example, say a parent dies and leaves £500,000 for his two children. If, as today, the IHT rate is £285,000, there would be 40 per cent tax to pay on £215,000 under the current arrangements.

Applying the accession proposals, though, there would be no tax to pay since each child would receive £250,000 - well inside their individual £285,000 IHT thresholds.

"We think [it will encourage] people to spread their wealth between more people," says Will de Peyer, the Lib Dems' Treasury adviser.

It's not just the political parties banging the drum for change. Many in the financial services industry have called for radical reform, and most prominent among these is the Halifax.

In its position as the country's biggest mortgage lender, it has cranked up its research team to pump out a stream of reports highlighting how property prices have outstripped the IHT threshold.

Four reports in as many months have focused on this concern. Last week, the Halifax revealed that one in 10 of 480 towns in England now had an average house price worth over £285,000 - catching many more into the IHT net.

Five years ago, the same survey found that just 4 per cent of homes were worth more than the then £242,000 limit.

In August, the bank underlined how there had been a 72 per cent rise in the number of estates paying IHT in the five years to the 2003-04 financial year. The figure, it said, stood at 30,451.

The bank also flagged up the Government's rising tax take - a record £1.7bn in the first six months of this year - from death duty.

"It's the danger of hitting both middle England and those it wasn't intended to target, such as people without the means to get around IHT [via trusts or tax planning]," says Martin Ellis, chief economist at the Halifax.

Many solicitors, accountants and specialist financial advisers report a huge increase in the number of families wanting to know how to keep a lid on their IHT liability.

This is often accomplished via a discretionary will trust - which in effect lets you cut your home in half to make use of both spouses' allowances - or by giving away large cash gifts, which will be free of tax as long as you live for another seven years.

The Halifax's campaign centres on getting the IHT rate to be linked to house price inflation; if the Government had pursued such a policy over the past 10 years, the tax threshold would be £430,000.

"For the majority of people, the house is the biggest asset," adds Mr Ellis, "and that makes it more difficult to get around the tax."

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