Two families in five face inheritance tax

Tuesday, 23 January 2007 12:00

More than two families in five (41 per cent), or ten million British households, are now liable for inheritance tax, up from one household in three (34 per cent) last year.

And Scottish Widows research shows Britons are planning on giving away £103 billion to friends and family to dodge death duty.

Inheritance tax takes 40 per cent of the value of everything passed on to friends and family over a certain threshold (currently £285,000).

But as house prices have risen ever higher, more and more people are becoming liable for the tax.

"Inheritance tax is a tax that affects almost half of the country and it is really important that people prepare for the possibility of leaving a huge tax bill on their death," said Anne Young, tax expert at Scottish Widows.

And those liable are increasingly taking action - with 43 per cent having already taken or planning to take steps to mitigate this bill.

Another 44 per cent - 1.2 million Britons - are set to give money away to friends and relatives ahead of their death, with the average amount set to be gifted at £86,000.

"Gifting is becoming an increasingly recognised way to avoid inheritance tax, but remember few gifts are totally exempt," Ms Young said.

"You can give £250 away to an unlimited number of people as well as up to £3,000 per tax year - these will all be exempt.

"In addition, if you live for seven years after making any other absolute gift, this will be exempt too.

"As a quarter of the recipients plan to use the money to pay off their own debts, it is obvious they could ill afford to pay additional inheritance tax on top."

As well as gifts, Scottish Widows highlighted trusts as a way of getting around inheritance tax, with four in ten of those taking action to mitigate inheritance tax looking into a discretionary will trusts or a life assurance policies written under trust.

However, one person in four (24 per cent) is wary of putting money into trusts after the government introduced the Finance Act 2006 - changing the way trusts are taxed.

"Trusts should be more popular than they are," Ms Young said.

"Although people may be unsure how they work, they are a relatively straightforward way of helping to reduce, or perhaps set aside a fund to pay for, an inheritance tax bill."

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