Inheritance Tax Needs Forward Planning

Many people could be failing to plan ahead by neglecting the issue of inheritance tax and therefore could be causing potential problems for their children.

Recent research from Bradford & Bingley discovered that just two per cent of people who don't expect to be liable to pay IHT have planned ahead to avoid paying it. The study also revealed that around 25 per cent of people automatically assume that they will be able to pay any possible IHT from their inheritance – even though this is often not the case.

The rising price of UK housing means many more people are discovering that estates are worth more that IHT thresholds and therefore are running into problems because of a lack of planning ahead to ensure that offspring will receive their full inheritance.

At present, the IHT threshold stands at £285,000 and therefore many people automatically assume that total estate will not be subjected to the tax. However, the threshold was raised in the last budget from £263,000 because of concerns that too many people were being subjected to the 40 per cent tax on assets above the threshold.

The average house price now stands at £199,183 – once any savings, belongings or investments are added on; it is likely that many estates could require some taxman involvement, especially when including property located in areas of high house prices.

Many people are also ignoring the practical problem of how to pay the IHT as in most cases the bill must be paid by executors before they are able to manage their assets and pass them on to beneficiaries.

Andrew Stead, head of wealth at Bradford & Bingley, said: "As house prices have rocketed over the past few years the value of the average family’s home alone is now close to, or over, the IHT threshold."

He added: "Although most people understand what constitutes an estate, alarmingly many are still unaware how much their estate will be worth and more importantly, how to mitigate against a hefty tax bill on death."

There are a number of ways for families to ensure that loved ones and children do not have the added burden of paying and dealing with IHT. Planning ahead and seeking the advice of an Independent Financial Advisor can help to reduce the chances of offspring being forced to sell assets or the family home, especially as most gifts made more than seven years before death are exempt from IHT.

Family members are also able to provide regular tax-free gifts to each other such as wedding money and small limited one-off cash lump sums.

Assets passed between husband and wife are not subjected to IHT and the 2004 Civil Partnership Act ensures that same-sex spouses no longer have to pay tax on inherited assets.

Many critics of the current IHT scheme are now calling on the government to consider raising the IHT threshold again to around £400,000 to reflect the growing trend of the housing market and ensure that the vast majority of people do not find assets being subjected to the tax.