Inheritance tax set to be an increasing concern

Britons are set to receive a property windfall over the next 15 years, as a number of the "baby-boomer" generation will leave their home in their wills to children and other relatives in some cases.

According to a report by Halifax Financial Services, the public could inherit £360 billion worth of property and the group estimates that housing would be 60 per cent of all assets bequeathed, up from 49 per cent in 2002-03.

This is down to an ever increasing number of families living in their own home, with the report stating 78 per cent of "baby-boomers", those born from after the Second World War until the mid 1960s, now own a property and even 70 per cent of families of all ages are homeowners.

The report also predicts that the total value of housing assets passed on will more than double from £14 billion in 2002-2003 to £32 billion by 2019-2020.

Although this increase in property will be beneficial to the people who receive them, the housing assets figures coupled with house price growth means that in the next 15 years a much higher number of properties are set to be above the inheritance tax threshold.

At the moment, inheritance tax applies to any estates worth more than £275,000 and the excess is taxed at 40 per cent. As well as the house this includes items such as cars, bank accounts, businesses owned, jewellery and collectibles.

Recent studies have recorded a rise in the number of people affected by inheritance tax and predicted further increases in the future. Earlier this month, a report by Scottish Widows revealed that around one in three estates are liable for the tax, with the average household wealth at £258,000.

It also said 2.8 million people in the UK are now liable for inheritance tax through the value of their home alone.

Late last year, analysts from Grant Thornton and Lombard Street Research predicted that the number of people liable for inheritance tax would rise by 70 per cent in seven years, from two million in 2002 to 3.5 million in 2009.

Ian Johnson, head of private client services at Grant Thornton, commented: "While it used to be a tax on the very rich, our research has shown it is a growing problem for millions of people with modest estates."

A major factor for this is that house prices are expected to continue increasing at a faster rate than the rise in the inheritance tax threshold.

A separate study from Halifax calculated that house prices increased by 164 per cent between 1995 and 2005, whereas the inheritance tax threshold rose by only 79 per cent in the same period.

The threshold will go up to £300,000 in 2007 but it will have to increase at more regular intervals to reduce the deficit.

Therefore, it appears that advisers will find many more people asking for their advice on how to reduce the wealth of their estate. There are ways to do it although with some of them there are risks involved.

One option people should definitely consider is becoming separate tenants of a house so that when one person dies the other does not automatically inherit the housing wealth left by the deceased person.

Also, in the will a person does not have to leave a specific amount, instead stating they want to leave an amount equivalent to the nil-rate band of the tax operating in the year of their death.

Another is giving offspring various gifts, up to £3,000 a year, that are free from tax and higher tax-free amounts can be exchanged as long as the person giving the asset away survives for another seven years.

Other ways include equity release and investing in shares on the Alternative Investment Market (AIM), smaller fast growing companies on the second tier of the London stock exchange.

However, living for a long period of time after releasing equity could be harmful as the interest on equity release loans could raise the net value of the estate more than by not releasing equity, even with rising property values. Also, a large fall in share prices even on the AIM will render the investment pointless.

Therefore, detailed planning is required by consumers and advisers before decisions are made on how to deal with an estate above the inheritance tax threshold.