4 In 10 Caught In Death Tax Trap

Four in 10 families now face paying inheritance tax as Gordon Brown comes under mounting pressure to raise the £285,000 threshold.

A year ago, only a third of householders were liable for death duties, which were traditionally the province of the super-rich, Scottish Widows said. But more and more families are being affected as the Chancellor refuses to raise the tax threshold in line with rising house prices.

The news came as it emerged that at least a million more middle-income people such as teachers and nurses had been dragged into the higher-rate income tax band since Labour came to power.

Calculations by the Institute for Fiscal Studies (IFS) show that 3.25 million people will pay the 40 per cent rate in the current financial year, compared with around two million when the Tories left office in 1997.

Last night there were calls for taxes to rise even further as the Left-of-Centre think-tank Compass called on the Chancellor to increase income tax rates to Scandinavian levels to fund more public service spending.

Both income and inheritance tax are proving huge earners for Mr Brown. Inheritance tax added £1.7 billion to the Treasury’s coffers in the first half of last year, experts estimate.

The increase in the number of higher-rate taxpayers has pulled in around £3 billion more every year and is blamed by experts on Mr Brown’s refusal to raise tax allowances in line with earnings, which have shot up by around 50 per cent in the last decade.

Instead, the Chancellor has put them up in line with, or in some years slightly below, the rate of inflation, which has risen by just 31 per cent over the same period.

Anne Young, a tax expert at Scottish Widows, said thousands more people were paying inheritance tax because of a six per cent increase in property prices last year.

The Chancellor’s decision to raise the threshold just 3.6 per cent last April had “not had any impact on people liable for inheritance tax”, she said. “In fact, the situation has worsened.”

Mr Brown has so far resisted calls for the inheritance tax threshold to be linked to house price growth. The Treasury says no administration has ever linked inheritance tax to house prices and that it has no intention of doing so.

Figures from HM Revenue & Customs show that the number of people paying the tax with estates valued at more than £2 million is not rising as fast as the number of people with less money paying the tax — suggesting that sophisticated tax loopholes are allowing the wealthy to avoid paying.

Scottish Widows said fewer than half of people with assets above the £285,000 inheritance tax threshold have done anything to mitigate the effects of the tax.

This means that many descendants will face a huge bill on their relatives’ deaths. Inheritance tax is charged at a flat rate of 40 per cent on anything over £285,000, although assets passed between spouses are always free of the tax.

Scottish Widows research showed that 1.2 million people were planning on giving away either a lifetime gift or an annual gift to friends and relatives in an attempt to avoid the tax.

Other ways to protect money against inheritance tax include setting up a discretionary will trust or a life assurance policy written under trust.

Ms Young said: “Inheritance tax affects almost half of the country and it is really important that people prepare for the possibility of leaving a huge tax bill on their death.

“Education is needed on the different ways that people can leave their money to the next generation as tax-efficiently as possible.”