Rocketing house prices and the need for financial security means that Inheritance Tax is still a key issue for most people despite the increase in the thresholds in April 2006, says the Association of Chartered Certified Accountants.
Following calls from former Labour cabinet minister Stephen Byers for IHT to be abolished, Chas Roy-Chowdhury, head of taxation at ACCA, says: Currently, 40% of anything left behind in an estate above the new 285,000 nil-rate Inheritance Tax threshold goes to the government.
Despite this rise in the threshold, thousands more people will still have to pay inheritance tax, since house price inflation is running at a much higher level than the overall inflation rate, and this allowance will not keep pace.
He adds: The ACCA has called upon the government to overhaul the system with a view to making the main residence exempt from Inheritance Tax, therefore removing one of the great inequities of the tax system and so reducing the burden on ordinary taxpayers and their families.
Until the position changes though, it is of paramount importance that sensible tax planning is carried out sooner rather than later to reduce any potential burden.
The first step is to make a Will as this not only allows individuals to plan carefully how they want their estate and personal belongings to be distributed after their death, but may also help to ensure that the taxman does not end up being the main beneficiary.
The transfer of property and gifts between husband and wife no matter how large in value are exempt from Inheritance Tax.
And as each partners estate is assessed individually at the time of their death and each qualifies for the nil rate threshold, this provides them with an aggregate exemption of 570,000.
Another way of reducing any Inheritance Tax liability is financial gifts.
These are made during a lifetime and up to 3,000 a year can be made without incurring any liability, with parents able to give up to 5,000 each on a child’s marriage.
Any number of small gifts of up to 250 per person per year can also be made free of Inheritance Tax.
Roy-Chowdhury says: The challenge of cutting potential Inheritance Tax bills has recently been made tougher by the closure of tax loopholes which allowed people to give away assets – houses, paintings, boats – while retaining an ability to use them.
Now, anyone living rent-free in a house given to their children will get an annual income tax bill, based on the rent they should pay for living there.
They will have a choice either to take the asset back into their estate, on which inheritance tax will be payable, or they will be able to pay an income tax charge on 5% of the value of the asset.