UK inheritance net spreads ever wider .jpg

UK inheritance net spreads ever wider

By: Bill Blevins

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IT CAN’T have been more than a generation or two ago when inheritance tax (IHT) wasn’t featured in most people’s everyday conversation. Today, it is.

When home ownership took off and became available to the man in the street, more and more people gradually began to buy their own homes. Now, a record number of ordinary people are being drawn into the IHT net and it is one of the most feared taxes in the UK today.

The current IHT tax free allowance is 285,000 pounds sterling, due to rise to 300,000 pounds sterling from April, increasing to 312,000 pounds sterling in 2008/9 and then to 325,000 pounds sterling in 2009/10. You may draw in a deep sigh of relief that the threshold will rise, but so undoubtedly will the value of your assets, which will be creamed by IHT by a whopping 40 per cent!

IHT is such a controversial issue that it could make or break a government.

It has been described as the most unfair tax of all. It is a cross between a gift tax and death duty and payable on the value of all assets a person owns on death. But the value of assets accumulated during a long working life has usually already been taxed for income and capital gains, many believe that taxing it again is nothing short of a double whammy.

The reason why so many people are liable for IHT is the value of their homes. The IHT rate rises in line with the retail price index and not in line with the increase in property prices. Over the past decade, house prices have risen by 179 per cent, but the IHT threshold has increased by only 85 per cent. The current IHT threshold rose last April by 3.6 per cent, house prices rose by 6.3 per cent. According to the Halifax, if IHT had risen in line with house prices and not inflation, the current IHT threshold would stand at 430,000 pounds sterling.


A study by Scottish Widows shows that by the end of last year, over five million people were liable for IHT based on the value of property alone. A further five million were affected when their total household wealth is calculated. The report added that the proportion of UK households facing IHT rose to 41 per cent, or 10 million households in 2006, up from 34 per cent the previous year.

Now in its second year, the Scottish Widows IHT index reveals that the average household wealth liable for IHT stands at around 261,000 pounds sterling, just over eight per cent under the current IHT threshold.

Over recent years, IHT has claimed more and more victims in large amounts.

Here are some more facts from the Halifax:

• Over the five years to tax year 2003/04, the number of estates paying IHT rocketed by 72 per cent.

• Over the five years up to 2006, the IHT revenue increased by 49 per cent.

• Estates worth under 500,000 pounds sterling accounted for 71 per cent of the total number of estates paying IHT last year. Over the five years to 2003/4, the percentage rose by 75 per cent.

• In the first half of 2006, the amount of IHT duty collected matched the total IHT revenue taken during 1997/98.

• IHT has doubled since labour came to power in 1997. For the 2006/7 tax year it expects to take 3.6 billion pounds sterling in IHT duty.

Research by Scottish Widows also reveals that despite the increase in households becoming liable for IHT, few people know the amount of the IHT threshold. It says six in 10 (62 per cent), or 15.7 million homeowners said they have no idea concerning the amount set for the IHT threshold. Of those homeowners that thought they knew the threshold limit only a third (36 per cent) actually identified it accurately as being 285,000 pounds sterling. Of those actually liable for IHT, only a third (33 per cent) could state the correct IHT threshold.


Two-thirds (67 per cent) of all homeowners said they think the current IHT threshold is unfair and a third (31 per cent) of these think that inheritance should not be taxed at all. One in five (22 per cent) said inheritance should not be taxed between blood relatives and a quarter (26 per cent) thought the threshold should be raised to over 500,000 pounds sterling.

However, other research has shown that the standard of IHT planning in the UK improved in 2006, compared with 2005, although Britons were still expected to waste around 1.3 billion pounds sterling on poor IHT planning in 2006.

This figure represents a drop of almost 300 million pounds sterling compared with 2005, demonstrating that homeowners are becoming more aware of the merits of effective IHT planning.

The report warns that this trend could be short lived, as house prices continue to rise at a much faster pace than the IHT threshold.

IHT is often also dubbed a voluntary tax because it doesn’t have to be paid if you take the right precautions. Most expatriates are liable for IHT although many do not realise this. With appropriate and timely estate planning, IHT can be avoided.

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