Release date: March 2003

As house prices continue to rise, more home-owners could be served with a large bill for inheritance tax (IHT).

Inheritance tax is a further tax after you have paid tax through your income, savings and investments, and even in retirement on your pensions. It is a 40% tax on everything you have amassed over the tax-free threshold of £250,000. Therefore, if you had an estate worth £260,000, your heirs would face a £4,000 bill on the £10,000 you own over the threshold.

Someone with an estate worth less than £250,000, on the other hand, would not pay a penny in IHT.

Careful planning, however, may limit the amount of IHT to be paid. One such plan is by making or updating a Will. Transfer of assets between husband and wife is free from IHT, so if the husband dies, the wife will not pay any IHT, and vice versa. However, the tax may be payable on the death of the second spouse if the estate exceeds the IHT threshold, so it is essential to ensure that you make use of both spouses’ £250,000 IHT exemptions. In this way a couple can bequeath £500,000 completely free of tax.

Property is usually the most valuable asset, and on the death of the second spouse the full value of the property will be included in his or her estate. To reduce this, changing the terms of ownership of the property from "joint tenancy" to "tenants in common" provides separate ownership of each spouse’s half of the property. Each spouse can then bequeath in their Wills, their share of the property to the children or grandchildren, without affecting the right of either husband or wife to continue living in the property after either death.

For example, if a home is worth £500,000, under a joint tenancy arrangement, the property would pass intact to the surviving spouse, and after the second death the estate would face a large IHT bill. Alternatively under a tenants in common arrangement, on the first death half the property’s value would be transferred to a child without an IHT charge. The surviving spouse would also have the value of the estate reduced for tax purposes.

"There are many complexities in the world of Inheritance Tax,"

says Iain Robson, a Solicitor specialising in Wills and Probate at Close Thornton Solicitors.

"It is essential to take good, early action. Even if your wealth does not yet breach the £250,000 mark, rising property prices and the value of other assets may soar well over the limit in the coming years, so you should start your planning immediately. The name of the game is to remove as much as possible from your estate so that as little as possible is used to calculate your IHT liability."

This article is not intended to be an exhaustive statement of the law or a substitute for seeking specific advice. For further information please contact Iain Robson on 01325 466461 or email iain.robson@close-thornton.co.uk.

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