Money
Retirement
Chancellor increases inheritance tax threshold
Inheritance tax is again in the headlines following Chancellor Alistair Darling's announcement of plans to effectively double the starting rate of the much-hated tax, in his Pre-Budget report, writes Holly Thomas
Under previous Labour government rules, estates valued in excess of £300,000 make them liable for 40 per cent IHT bill.
Starting immediately, married couples and those in civil partnerships will be able to pass on estates worth up to £600,000 to their children without paying any inheritance tax (IHT).
Financial experts say that while this is good news, it was already possible to effectively increase the threshold with careful tax planning.
"Using a 'discretionary will trust' you were able shelter your money from tax anyway," said Ian Hudson of financial advice firm Hudson Green.
"For couples with tax efficient wills already drawn up, Darling's plans mean very little - but it may now be worth considering whether they are still appropriate, given that some may cost money to run."
For those with estates less than £600,000 who have done nothing in the past to reduce IHT liability, the news may help avoid large solicitors' bills since they no longer need to do anything.
It is worth noting that partners who co-habit will still have the original £300,000 starting rate, increasing to £350,000 in 2010. If they wish to pass more than this to their children, for example, they will still need to set up a special trust to avoid a large tax bill.
One major criticism of the previous IHT system was that thresholds had failed to keep up with inflation and the UK's booming property market.
CML director general Michael Coogan said: "The effect of the Chancellor's announcement is broadly the same as if he had fully indexed the inheritance tax threshold for the effect of house price movements since Labour came to power, which would have resulted in an exemption threshold of £608,600."
The Chancellor said he will consider house prices when making future increases in the nil rate band.
Darling also announced a flat rate of 18 per cent for Capital Gains Tax (CGT) - charged on profit made when selling certain assets - scrapping indexation allowance or taper relief from April 2008.
This will be good news for some including those who have a holiday home abroad - or here in the UK - to sell. Under the current regime owners could face tax bills of up to 40 per cent. From next year they will pay a much reduced bill of 18 per cent.
CGT is a hugely complex area and the simplified system of one rule for all will be welcomed by many.
Disappointment reigned for those expecting changes to stamp duty. This tax has also failed to be changed in line with extreme house price increases - and was left unmentioned in the Pre-Budget report.
Buyers pay nothing on houses purchased at £125,000 or less; one per cent up to £250,000; three per cent up to £500,000; and four per cent above £500,000. If it had kept pace with house-price inflation since Labour came to power in 1997, stamp duty would start at £185,000. The £250,000 threshold would be £680,000, and the £500,000 cut-off would be £1,360,000, according to Halifax.
Ray Boulger at mortgage broker John Charcol, said: "With average house prices now around £200,000 the lower limit for stamp duty should be set at least at this level. The system as it stands is massively flawed and requires a complete overhaul to make it fairer and bring it in line with current property market conditions."
The Chancellor also confirmed plans to encourage borrowers to take out longer-term mortgages in an attempt to stabilise the market.
