INHERITANCE TAX

The rise in property prices in recent years has meant that an increasing number of estates attract inheritance tax (IHT) of 40 per cent. Nobody wants to pay tax at this rate if they can possibly avoid it, so it would be prudent to assess whether the value of your estate is likely to be above the current IHT threshold (£285,000 in 2006/7, £300,000 in 2007/8 and £312,000 in 2008/9) and, if so, take action to reduce liability, by giving away some of your assets while you are alive, for instance.

There are, however, restrictions on the amount you can give away. The annual limit for large gifts is £3,000, but you can make as many gifts of up to £250 as you wish. You can also make wedding gifts of up to £5,000 to each child, up to £2,500 to each grandchild and up to £1,000 to others.

Fortunately, there are exemptions – parts of your estate which do not attract inheritance tax. Where spouses own a property jointly or operate a joint bank account the transfer of assets to the surviving joint owner is normally exempt from IHT. Bequests to registered charities, business assets, agricultural property, woodland and National Heritage property are also exempt. It may be possible to mitigate some tax liability by creating a trust, but it is essential to obtain professional advice from a solicitor or an accountant if you intend to do so.

The good news is that currently 94 per cent of estates do not attract inheritance tax. One reason for this could be that many far-sighted individuals take steps to limit liability to this tax before they die.