Inheritance tax threshold frozen in pre-Budget report

Despite previous plans to raise the Inheritance Tax (IHT) threshold to £350,000, the Chancellor, Alistair Darling, announced in his pre-Budget report that it will be frozen at £325,000 for individuals and at £650,000 for married couples and civil partners for another 12 months.

He calculated that the extended freezing of the threshold would ensure that "fewer than 3pc of estates will pay inheritance tax".

The move has received a mixed reception, with some calling it a political move, and others saying it has little impact. Patricia Mock, a director in the private clients practice commented that "IHT is expected to yield in total £2.2bn, compared to £144.7bn from income tax, in 2010/11, so the decision to keep the allowance at £350,000 will not have a huge effect on the overall revenues from the tax."

Inheritance tax is currently charged at 40pc on all assets worth more than £325,000. Anything left to a spouse or civil partner is exempt, and married couples and civil partners can also transfer any of their unused allowance to their partner on their death. If the last person in a married couple or civil partnership dies, their joint allowance is £650,000.

Louise Somerset, tax director at RBC Wealth Management, argues that the Chancellor missed another opportunity to solve the issue of taxation of the family home on death saying "It is a pity that yet another year has passed without this issue being addressed. Freezing the IHT nil rate band at £325,000 until 2011 will bring more estates into the tax net."

Lenore Rice, a solicitor specialising in Estate planning at Wilson Nesbitt solicitors in Belfast, Northern Ireland, commented that "Not only will the inheritance tax level stay where it is, the government intends to clamp down on tactics used to avoid IHT.  There are legitimate ways of reducing the value of your estate such as annual gift allowances and potentially exempt transfers (any assets you give away are exempt from IHT after seven years - if you die within that time they would still be classed as being part of your estate for IHT purposes).

"Essentially the wealthier you are, the harder mitigating IHT becomes. However, there are ways of shielding your wealth from the taxman - they're complex and most people won't need to make use of them, but IHT planning is worthwhile for those with large estates. Clients should seek legal advice with a view to either making tax efficient Wills or reviewing their existing Wills."

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