Yorkshire Post article – Property section Sat 19th November 2005

Nigel Shaw Director of Trusts & Estate Planning

Brown looking to increase Inheritance Tax yield as house prices rise

A recent report issued by Lombard Street Research and top accountancy practice Grant Thornton once again highlights the growing impact Inheritance Tax (IHT) will have on an ageing UK population.

The report highlights that in 2002 (the last year for which data is available) the Government raised £2.4 billion from a relatively small tax group of 24,000.However, it is predicted by analysts that by 2009 the IHT bill for the UK will increase to £7.3 billion effecting almost 50,000 UK estates.

One of the main drivers in this significantly increased tax yield is the effect house prices have in relation to an individual’s total assets. More families are finding themselves potentially liable to an IHT charge on their properties because the starting point for IHT (known as the nil rate band) is barely keeping pace with house price inflation (even at the recently reduced pace over the last 12 months).

If we look at the period since New Labour came into power in 1997 to date the “average” house price will have increased by a staggering 142%. Compare this to the % increase in the “nil rate band” of just 28% and you hit a phenomenon well liked by the Chancellor known as “fiscal drag”. Or put more accurately the mechanism by which the Government deliberately increases tax allowances & thresholds at a very low inflationary rate whilst general incomes and property valuations increase at a significantly higher rate.

Not surprisingly the effect of IHT “fiscal drag” will have dire consequences for many individuals in Yorkshire but particularly in property hotspots such as Harrogate, Wetherby and Ilkley where there as been “above average” house price inflation.

So what can be done to avoid becoming one of the 50,000 estates, which potentially will become a victim of the IHT trap. Some general ideas would include:

1. Keep your Wills up to date and make sure they are drawn up on an IHT “efficient” basis.
   
   The recent Special Commissioners case of “Judge & Judge v HMRC” rather surprisingly gave the taxpayer support in structuring wills so that they can hold private residences in a way, which can minimise the eventual IHT bill
   
2. Review the legal basis of your property ownership. Generally from an IHT planning perspective there will be a need to hold the property as “tenants in common”.
   
3. Take care if you hold more than one property – try to “equalise” assets if you are a married couple or same sex couple considering a Civil Partnership with effect from next month.
   
4. Despite the introduction of POAT (Pre Owned Asset Tax) it is still possible to use trust structures to hold 2nd properties & holiday homes in an IHT efficient manner.
   
5. If all else fails remember the IHT bill will not have to be paid in one lump. HMRC do rather kindly allow estates to pay over a 10 year period with annual instalments. These can often be met out of a subsequent rental stream if the family decide to keep the property for the longer term.
   
6. Finally,certain holiday homes & property rental companies may be eligible for a very valuable IHT relief known as “Business Property Relief” which provides 100% relief on estates. There is a similar relief for properties used in agriculture but recent noises from the HMRC suggest they will be denying relief on those elegant properties which are not directly used for agricultural purposes.

Nigel Shaw is with Garbutt & Elliott,Chartered Accountants & Business Advisors based in Leeds & York. He is a member of the Society of Trust & Estate Practitioners (STEP) and can be contacted on: 0113 273 9600.