More escape inheritance tax

More people will escape the inheritance tax net when they die following plans announced to raise the threshold at which it kicks in.

Chancellor Gordon Brown is increasing the level at which the tax becomes payable from its current level of £275,000 to £325,000 over the next four years.

Inheritance tax is currently charged at 40% on any assets worth more than £275,000 that someone leaves behind when they die.

Mr Brown claimed that 94% of estates did not have to pay the tax.

But the Chancellor has been coming under increasing pressure to raise the threshold at which inheritance tax becomes payable after the level at which it starts has failed to keep pace with house price inflation.

Mortgage lender Halifax said if the threshold had kept pace with house price growth during the past 10 years it would now be £425,000, adding that the failure of successive governments to raise it in line with house prices had led to increasing numbers of estates being liable to pay the tax.

But alongside measures to raise the inheritance tax (IHT) threshold, the Chancellor also changed the inheritance tax treatment of trusts.

People will now have to pay tax on trusts when they are set up if they are worth more than the current IHT threshold, while a further charge will be levied on them on every 10th anniversary after they were created.

The measures will apply to both trusts set up in future and existing ones from 2008.

David Rothenberg, senior tax partner at chartered accountants Blick Rothenberg, said: "There are very, very few trusts which can now be created that will not give rise to any inheritance tax charge."

Mr Brown also clarified the IHT rules on pensions benefits that had been deferred until after the age of 75, saying money left to a wife, civil partner or charity would not be subject to the charge, otherwise it would be included in the overall value of the estate.

Accountants PricewaterhouseCoopers said despite the increase in the IHT the Chancellor had done little to address the fact that people who were not originally targeted by the tax were now paying it.

Clive Mackintosh, tax partner and head of private clients at PwC, said: "It is disappointing, but not surprising, that the Chancellor has missed another opportunity to announce a reform of this tax.