Homeowners caught in Inheritance Tax trap

A further five million are liable for IHT when total household wealth is taken into account, making a total of 10 million households with an estate liable for a 40 per cent tax bill on their death.

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The Scottish Widows IHT index, now in its second year, analyses property prices and assets after debt, and reveals the average household wealth liable for IHT now stands at about £261,000, just over 8 per cent under the IHT threshold.

However, the findings reveal that there is still little knowledge of this tax with 15.7 million homeowners admitting they have no idea what the IHT threshold is.

Of those homeowners that think they know the threshold limit, only a third actually identify it accurately as £285,000.

Anne Young, tax expert at Scottish Widows, said: “Our research shows that the Government raising the threshold by just over 3 per cent in the last Budget has not had any impact on the number of people liable for IHT, in fact the situation has worsened.

“The 6 per cent rise in property prices means that thousands more people will now face IHT this year compared to 2005. Whilst the average household wealth has increased from last year, so too has the amount of liabilities meaning the possibility of an added burden of debt left behind to relatives in the event of a death.”

Four in 10 people with property worth over £285,000 have not taken any steps to reduce the amount payable in inheritance tax. One in four people say this is because they are too young to worry, with a similar amount admitting that it hasn’t occurred to them to even think about reducing their liability.

Young said: “It is important people understand what inheritance tax is, and how families will be affected upon the death of a loved one. IHT is no longer a rich man’s tax, it is a tax that affects more people every day.

“Spending a few pounds today on inheritance tax planning could mean a future saving of thousands of pounds. I’m sure people would rather their relatives get their inheritance as opposed to the tax man.”