Death and taxes - millions more estates 'will go over IHT threshold'

Death and taxes - millions more estates 'will go over IHT threshold'

Nearly four million estates will be potentially liable for inheritance tax by 2009, netting the government an estimated £5.2 billion.

Analysis of UK inheritance tax by Grant Thornton and Lombard Street Research has found that if assets increase by average long-term asset price inflation, the number of estates above the IHT threshold will rise to 3.6 million, up 1.5 million on 2002 figures.

Mike Warburton, senior tax partner at Grant Thornton, says: 'It's easy pickings for the government ... Yet it's a fundamentally unfair tax.'

He cites the example of a client with £37m. She plans to give her children all bar £6m, on which she can live until her death. Provided she lives another seven years, the entire £31m she hands over will be free of tax.

But someone with an estate worth, say, £300,000, including a house worth £200,000, exceeds the IHT threshold of £275,000. However, he is unlikely to be able to afford to give £25,000 to his children to avoid tax that will otherwise be payable on his death.

Warburton says it would be logical for the Chancellor to exempt homes from IHT - as they are from capital gains tax, though this could stoke house price inflation.

Alternatively, he suggests thresholds to take account of regional variations in house prices, or a range of tax rates, starting at 10 per cent, an idea favoured by the left-wing think-tank, the Institute for Public Policy Research.

Warburton.....continued below

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is calling on Gordon Brown to announce a consultation into a reform of IHT in the pre-budget report. He points out that Brown attacked the tax in 1994, saying: 'If society is to have inheritance tax, it must be operated fairly.'

Meanwhile, anyone who wants to minimise tax:

· Write a will. Nearly 60,000 people a year die intestate. The allowances stipulated in the intestacy rules have failed to keep pace with asset price inflation. Warburton says: 'This means those with more modest estates often have to sell their home, as this is usually the prime asset.'

· Spouses should establish nil-rate band discretionary trusts on their deaths. This means transferring assets into a trust up to the value of the IHT threshold in the names of children, but enabling the surviving spouse to benefit until their death.

· Make potentially exempt transfers. These are gifts of assets made during your lifetime, which are exempt from IHT provided you live seven years from the date of making the gift.

See the full IHT report at www.grant-thornton.co.uk

Have your say

IHT stirs up strong opinions, as we found when we ran our IHT reform campaign earlier this year. Mike Warburton believes that most views fall into one of three camps:

A 'IHT is an unfair tax that penalises the prudent who save for their old age so as not to be a burden on others. It is also a tax on savings that have already borne tax.'

B 'We need schools and hospitals. Somebody has to pay. It's only fair that it should be the rich.'

C 'We are neither leaving our hard-earned money to the Chancellor nor our kids: we plan to spend the lot in our lifetime.'

Do you agree with A, B or C? Send your answer to cash@observer.co.uk

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