Treasury pockets record amount of inheritance tax

The house price boom means more families are facing bills, reports David Prosser

The revenue generated by inheritance tax in the first half of the year reached a record £1.7bn, according to figures released by Halifax Bank today. The bank says IHT revenues almost doubled from £1.7bn to £3.3bn between the 1997-98 and 2005-06 financial years, chiefly because the value of estates that can be left tax-free to heirs has risen by 85 per cent over this period, compared to a 179 per cent increase in house prices.

Tim Crawford, Halifax's chief economist, thinks the Government is unlikely to heed calls from former Blairite minister Stephen Byers to abolish IHT altogether. But he says action must be taken to protect the growing number of families caught within the IHT net - it thinks a fifth of all properties in the UK will on their own be valuable enough to attract IHT charges by 2020.

The Treasury has said it will raise the IHT threshold to £325,000 by the 2009-10 financial year. But Crawford says: "We call on the Government to raise the threshold to £430,000 to account for the increase in property prices over the past 10 years."

In the meantime, accountants continue to urge families to plan ahead to mitigate the effects of IHT. One of the Treasury's arguments for not reforming the duty is that, currently, only the top 6 per cent of estates pay IHT, but the number of families potentially caught is much higher.

Anne Young, a tax expert at life insurer Scottish Widows, says: "With a bit of careful planning, people can cut down the amount they are liable for IHT, or even eliminate it altogether." Young says the crucial first step for most families is to make a will, so that estates can be distributed fairly and in the most tax-efficient manner possible.

The best IHT-saving opportunity for most families is to be clever about using the married couple's exemption. Husbands and wives can leave each other as much as they like without any IHT being due, but this simply defers the tax bill. After inheriting everything, once the second partner dies, the entire estate is potentially taxable.

A better option, says Chas Roy-Chowdhury, head of taxation at the ACCA, the accountancy body, is for husbands and wives to leave assets worth up to the annual threshold to another beneficiary.

This year, for example, a couple with total assets of £600,000 could write wills so that if one of them dies assets worth £285,000 go to their children. The remaining partner would then have an estate worth only £315,000, substantially reducing their future IHT liability.

Reducing the value of your estate through financial gifts is another possibility. You can give away up to £3,000 a year without incurring any IHT liability, and make as many gifts worth £250 or less as you want. There are a range of other tax-planning possibilities, but the Treasury, keen to crack down on IHT avoidance, has introduced all sorts of rules. For this reason, Roy-Chowdhury says most families would benefit from professional advice from a solicitor or accountant. At the very least, it's worth attending the free seminars run from time to time by organisations such as your local building society.

The biggest catch to watch out for is that you can no longer give away an asset in order to exempt it from IHT if you continue to derive a benefit from it. This prevents parents handing over property to children if they continue to live in it.

"Anyone living rent-free in a house given to their children will get an annual income tax bill based on the rent they should be paying to live there," says Roy-Chowdhury. "They will have a choice either to take the house back into the estate, or they will be able to pay an income tax charge on 5 per cent of the value of the asset."