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The Inheritance Tax Trap - Has the Government Done Enough?
by Miss Janine Byrne
Introduction
'The Government's economic objective is to build a strong economy and a fair
society, where there is opportunity and security for all."
So reads the opening statement of the Labour Government's 2005 Budget. But the
word 'fair' is wide off the mark when considering the incidence of inheritance
tax on an increasing number of homeowners over the past few years.
The Inheritance Tax Problem
Over the past few years
inheritance tax ceased to be the 'rich person's tax' or
the 'voluntary' tax which it used to be. The cause of the problem has been the
ever increasing scale of house prices resulting in property values which far
exceed the Nil Rate Band exemption for inheritance tax.
Research conducted by stockbrokers Brewin Dolphin, there are an estimated 2.4
million homes across the UK that are now valued above the £263,000 inheritance
tax threshold, before taking any other assets into account. And one in five
people anticipating an inheritance have no idea that anything over and above the
threshold will be subject to 40% of tax.
In summary, the number of homes sold which were above the inheritance tax
threshold rose from 3% in 1994 to 14% in 2004 and the Government has pocketed a
staggering £3.3bn in inheritance tax since 1997!
The 2005 Budget
The inheritance tax issue was a main concern for the Chancellor Gordon Brown
after various professional bodies have stressed the need for the threshold to be
increased. Having heard the arguments the Chancellor did just that.
The current Nil Rate Band threshold is £263,000 and the Chancellor has announced
that this is to be increased to £275,000 for the forthcoming tax year 2005/2006
and then further increased to £285,000 and £300,000 the following two years.
As a result of these increases the Chancellor has argued that 94% of estates
would not pay inheritance tax. So has the Chancellor done enough?
Adequate Increases?
Are the increases to the
inheritance tax threshold good enough? Should they have
been increased further? It is certainly true that previous inheritance tax
increases have not been so steep; usually the increases are made in line with
current inflation rates. However, this Budget has seen an increase which is way
above inflation.
On the other hand, the contrary argument is that the high rise in house prices
necessitated such an increase, and even this may not be enough. The Halifax
Building Society calculated that had the inheritance tax threshold increased in
line with house price inflation over the last 10 years, then the current
threshold would be sitting at £390,000 - significantly less than the figure
announced by Gordon Brown.
Conclusion: Budget Blues
So was this a 'bad' budget' from the inheritance tax point of view? Not
entirely.
Any increase in the Nil Rate Band is to be welcomed as it sets free some of
those caught in the inheritance tax net. As Simon Massey (partner with chartered
accountancy firm Menzies) told BBC News, "The increase to the Inheritance Tax
threshold is a long way above inflation and is very welcome...It is good to see
something being done."
So whilst the increase may not exactly be in line with the current house price
situation, it will certainly be a relief to many, and any increase is better
than no increase at all.
JsByrne
LLB (Hons) PGDip.LPc.
www.Draft-Your-Will.com
Miss JsByrne holds a Bachelor of Law degree with Honours & a post-graduate
diploma in Legal Practice. Also gained qualification in Wills Writing & is the
owner/author of www.Draft-Your-Will.com and DYW Wills & Estate Planning
Newsletter - http://www.Draft-Your-Will.com/Legal_Updates.html
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