What is Inheritance Tax (IHT)?

Inheritance tax is commonly referred to as a 'gift tax' or 'death tax.'

If at the time of your death you pass on part or the whole of your estate, then the inheritor could be liable to pay inheritance tax.

There is currently an IHT threshold level of £285,000 for the 2006-2007 tax year. Anything above this amount is taxed at 40%, i.e., at the highest rate.

This means that if at the time of death your whole estate is valued at less than £285,000, the inheritor will have no tax to pay.

If the value of the estate is over this amount, then anything above the £285,000 will be taxed at 40%.

Why is IHT becoming a tax liability that people are increasingly and seriously starting to worry about?

This is primarily down to the recent house price boom.

Given the boom of property house prices of the past few years hundreds of thousands more homeowners have already fallen into the Inheritance Tax trap - which means that IHT will be due when they die.

Here are some interesting facts that demonstrate how seriously an issue IHT is becoming:

Firstly, in the first six months of 2004 alone an additional 500,00 homes went above the current IHT threshold. This means that the Inland Revenue will demand tax when the property owners die.

Secondly, new figures show that around 2.4 million people will be liable for IHT when they die. Only a few years ago, the number of people who were liable for this tax was just a fraction of this.

Thirdly, high property prices are normally associated with the South. However recent research by the Halifax bank has shown that 60% of properties that have risen above the IHT threshold are outside London and the South East. This demonstrates that IHT is no longer a tax that is associated with people in the south, but is in fact a tax that is becoming more commonly associated with those living outside this area as well.

Finally, the estimated number of properties now worth more than the inheritance tax threshold is four times greater than what it was in 1997. If the IHT threshold had risen in line with house price inflation then the current threshold level would be closer to £400,000, but instead it is only currently at £263,00. Again this demonstrates that more and more people are falling into the Inheritance Tax Trap.

Is it true that Inheritance tax is a 'voluntary tax' and therefore can be legitimately avoided?

In a nutshell this is true. If one plan's his or her estate properly (and avoids a premature death), there is absolutely no reason why they should pay any IHT whatsoever.

Roy Jenkins the former Labour Chancellor of the Exchequer famously described IHT thus:

"... it is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue..."

Why is it necessary to have a will?

Simple will planning is often the cheapest and most effective form of IHT planning. It also saves your family a lot of problems after you have departed.

Many people assume that their estate will pass to their surviving spouse in the event of their death. This is simply untrue. The intestacy rules will distribute the estate in accordance with a formula laid down in law depending on the size of the deceased estate and their surviving relatives. It is therefore imperative that a will is in place. In the case of unmarried couples, without a will the survivor has almost no rights whatsoever.

However, under present rules it is possible to write a posthumous will providing the all of the beneficiaries agree.

If I die tomorrow and leave my entire estate to my wife, will she have to pay IHT?

No. All gifts between husband and wife are exempt from tax as long as they are both domiciled in the UK.

This means that even if a husband has an estate valued at £10 million pounds, then he can gift this to his wife.

It does not matter if it was gifted during his lifetime or at the time of his death; either way, his wife will incur no tax liability.

What are some simple actions I can take to reduce IHT?

The following answer has been taken from the interview with Nigel Lord about 'How to Avoid Inheritance Tax.' This interview is just one of the Five interviews in the Property Tax Experts product.

First and foremost, it is essential to have an IHT efficient will. This is particularly important for married couples. In my professional capacity, I meet around fifty couples a year whose wills are written in such a way that they 'volunteer' to pay an additional IHT bill of over £105,000 because a simple will trust clause costing a few hundred pounds has been omitted.

Perhaps the second easiest and least costly planning method is to ensure that a proportion of the family home is transferred to resident children. This can be achieved using a family trust thus enabling the parents to retain effective control of their principle asset. This is quite a complicated issue and can have serious adverse Capital Gains Tax and Stamp Duty effects if implemented incorrectly, as well as being ineffective for IHT mitigation. It therefore should only be undertaken with appropriate professional guidance.

The next obvious planning method involves gifting assets to the next and future generation either directly or via some form of trust. It is quite possible to do this without relinquishing control of the asset, and in certain circumstances retaining an individual right to income.

Do back taxes prevent the sale of a house?