YOUR MONEY Q&A: How inheritance tax affects you

A new feature begins with a look at one of the Chancellor's concessions to Middle Britain

"Inheritance is now an issue for middle Britain," declared Kenneth Clarke in his Budget speech, saying he wanted to abolish inheritance tax as soon as that could be afforded.

Q: What is all the noise about inheritance tax?

A: John Major recently said he wanted to see the tax, which is levied on the estates of the dead, abolished. The Budget took the lesser step of just increasing the threshold at which the tax bites. Trouble is, even this improvement is being knocked because it does not take effect until the next tax year in April.

Q: But isn't inheritance tax just for the rich?

A: You might think inheritance tax is a minority taste, but it also hits the "middle Britain" that Mr Clarke went on about in the Budget. It bites on estates worth more than pounds 154,000 at a rate of 40 per cent. Importantly, this figure includes the value of the family home. People with relatively modest homes in areas of high property values could be at risk, especially if they have several thousands pounds in savings.

Q: So what did the Budget do?

A: The Chancellor chose not to abolish inheritance tax. In the next tax year it is expected to raise about pounds 1.5bn - equivalent to more than the 1p cut in basic-rate income tax - but he increased the tax-free threshold from pounds 154,000 to pounds 200,000. Estates worth less than the threshold escape the tax and the increase in the threshold should save estates of pounds 200,000 or more pounds 18,400.

Q: How many are affected?

A: The number of estates on which the tax will be levied in the 1996- 7 tax year is likely to be around 15,000; 7,500 having escaped thanks to the increase in the threshold. That is about 1 in 45 estates, compared with 1 in 30 in the current tax year. But an unknown number of people will use accountants and tax planners to minimise or remove any post- death tax bill.

Q: So it is easy to avoid this tax?

A: People with serious wealth can transfer it out of their potentially taxable estate, by giving things away at least seven years before they die, by setting up trusts, by diverting money to shares in unquoted companies (which escape the tax) and so on. But for those who have high-value homes and modest life savings, room for manoeuvre is limited.

Q: Can't people simply give away their homes?

A: This is riddled with pitfalls. Let us say you "give" your home to a trusted son or daughter. First, you will have to satisfy the tax authorities that the gift is genuine You will have to pay your new landlord a proper market rent. That is more expense for you, and your new landlord would have to pay income tax on the rent. He or she could also face a capital gains tax bill when the property is eventually sold. And if you were to die within seven years of making the gift, there could still be an inheritance tax bill, too. There are other complications. What would happen if you fell out with your new landlord? What would happen if he or she actually died before you? Giving away your home can be messy.

Q: That sounds worrying. What happens to my estate if I leave everything to my husband or wife?

A: There are no problems here. As well as the nil-rate tax band, there are some gifts that are exempt from inheritance tax and do not even count towards the nil-rate band. Crucially, this includes anything you leave your husband or wife. But the exemption will not cover you if you are not married. As a consequence, the exemption can never cover same-sex partners.

Q: Any other suggestions?

A: The surest way to see your heirs do not pay the tax is to leave them nothing. Spend, spend, spend while still breathing.

Q: Don't people like to leave something to their families?

A: Apparently so. Indeed the issue is being taken up by some politicians as if it were some inalienable human right. It is an unusual departure. A belief in a meritocratic society and an instinctive distaste for inherited wealth is fairly widespread, and not the preserve of those who used to be called socialists. In any case, the inheritors of middle-class wealth are most likely in their thirties, forties or fifties and financially well-established.

Q: Those socialists, are they still around?

A: Try asking Tony Blair or Gordon Brown, his shadow Chancellor. We can be sure that Labour is against the abolition of inheritance tax and is likely to eliminate the loopholes that allow the super-rich to avoid it. However, the betting is that even Mr Brown could well move the inheritance tax threshold even higher.

q Questions and answers compiled by Anthony Bailey.

PROMOTED VIDEO
News
Nadine Gordimer died peacefully at home yesterday
people
Arts and Entertainment
Neil Young performs on stage at Hyde Park
musicAnd his Hyde Park set has rhyme and reason, writes Nick Hasted
News
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Extras
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Paolo Nutini performs at T in the Park
music
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Programme Planner

£30000 - £45000 Per Annum: Clearwater People Solutions Ltd: Our client based i...

Infrastructure Test Lead

£55000 - £60000 per annum + bonus + bens: Deerfoot IT Resources Limited: Our c...

Messaging Support Consultant

£40000 - £45000 per annum + bonus + bens: Deerfoot IT Resources Limited: Messa...

Service Desk Analyst - ITIL, Windows, Active Directory

£35000 per annum: Harrington Starr: A world leading brokerage is looking for a...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
In pictures: Breathtaking results of this weekend's 'supermoon'

Weekend's 'supermoon' in pictures

The moon appeared bigger and brighter at the weekend
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor