Gordon Brown’s plans to increase the nil rate threshold on inheritance tax by a minimal amount has raised concerns. In the latest budget, the Chancellor set out his proposals to keep the tax in place until at least 2011 and concerns that this is fast becoming a ‘mainstream’ tax grow.
The growth in property values over recent years has resulted in this once rich man’s tax becoming a common problem for the ordinary homeowner. The overall value of assets that can be passed on free of inheritance tax (the nil rate band) will increase over the next four tax years from its current limit of £285,000 to £350,000 by the 2010/11 tax year. Given that average UK property prices are generally forecast to continue rising, the number of properties affected by inheritance tax over the four year period is likely to significantly increase.
Peter Bolton-King, chief executive of the NAEA, states: ‘It is disappointing that inheritance tax has not yet been brought in line with house price inflation. While appearing impressive on face value, the £65,000 increase to the nil rate band over the next four years equates to a 5.3 per cent annual increase and whilst this is ahead of the current Retail Prices Index, it is way behind the current growth in house prices. I would urge people to seek advice as to how they can best protect the value of their assets when the time comes.’
Speaking at the NAEA Residential Forum at the end of last year, John Varley, chief executive of MoneyMarketplace, advised: ‘Planning to avoid inheritance tax is a relatively straightforward process, which involves the use of some simple legal documentation. Everyone is allowed to pass on up to £285,000 (2006/07 tax year) before being subject to the 40 per cent tax. In a typical family, when one parent dies all their assets are passed to the remaining spouse; their tax free allowance, however, is not. This means that when the second parent dies they are effectively passing on two people’s assets but only using one person’s inheritance tax allowance.
By putting the correct legal documents in place the family can ensure that both parents’ allowances are utilised when the second parent passes away. The outcome being that a typical family can save up to £114,000 in potential inheritance tax and in such a way that their own position during their lifetime is not at all compromised.
‘Inheritance tax now affects around six million homeowners across the UK. If people only plan to make the most of both of their tax free allowances then the overall amount of inheritance tax paid can be significantly reduced and for the vast majority of those affected it can be removed altogether.’