The cost of inheritance

WHEN was the last time you had your house valued?

The chances are that unless you have moved recently then you only have a rough idea of the value of your property.

Now add on the sum of all your worldly possessions minus any debts you may have. What does it come to?

If it is more than £255,000 then you are one of a rapidly increasing number of people who are falling into the inheritance tax trap.

Inheritance tax (IHT) has always been regarded as something that other people pay - people of higher society who have a handful of properties and therefore something significant to pass on.

Well, IHT is about to make itself known to a lot of people whose estates would not usually have fallen victim to the stealth tax.

And the reason? The property price boom.

In 1997 the average price of a home in Hampshire was around the £100,000 mark while there was no IHT liable on an estate valued below £215,000. It meant that Mr and Mrs Average could afford to relax. Even their neighbours Mr and Mrs Comfortable could rest safe in the knowledge that should their children inherit their estate then it would be unlikely that any IHT would be levied.

Six years have passed since then and this year the average home in Hampshire will now cost you £175,000.

Meanwhile, last month's Budget saw the Chancellor Gordon Brown increase the nil-band rate of inheritance tax, the level at which you start to pay the tax, by another £5,000 to £255,000.

Simple mathematics will tell you that the gap between the price of your home and the level at which your family would have to pay inheritance tax has been closing rather rapidly. An increase of just £40,000 in six years or 19 per cent is reminiscent of a snail with a limp while average house values gallop away like the thoroughbred racehorse at a 75 per cent increase in the same period.

Once the value of your estate goes beyond that £255,000 mark then IHT is levied at 40 per cent.

So while the level of income tax may have stayed the same the Chancellor has been rubbing his hands with glee, knowing he is beginning to reap the rewards of the escalating cost of property.

Solicitor Sue England from the wills team of Southampton law firm Paris Smith and Randall believes many people just don't realise exactly what they have.

She said: "When people sit down and work out what they have such as the mortgage and value of their house, it's only then that they realise.

"But making a will can be hard. A lot of people do get upset.

"I have had people burst into tears. It's quite difficult to sit down and go through everything.

"If you get an estate of £400,000 you are looking at an inheritance tax bill of about £40,000. It is not tax efficient.

"Through careful planning people can avoid inheritance tax, which can come as a nasty shock at what is bound to be an upsetting time."

Although it dates back to Roman times, IHT was introduced under a Liberal government in 1894 as a way of redistributing inherited wealth. In 1986 IHT as we know it replaced capital transfer tax, which had been set up by Labour Chancellor Dennis Healey in 1975.

In 1997-1998 the government's net receipts from IHT were £1.68 billion. By 2001-02 they had reached £2.3 billion and to abolish it would mean the equivalent of an extra penny on income tax.

Since New Labour came to office in 1997 no IHT can be levied on a legacy left to charity and it has become an increasingly popular way to avoid leaving a legacy to the taxman.

Sue added: "I think lots of people do leave a legacy to charity. People with families often leave a token legacy but people with no immediate family often leave most of their estate to charity."

Many national charities benefit enormously from legacies with up to 50 per cent of their income coming from people's last testament. Even smaller regional charities such as the Southampton-based charities Wessex Cancer Trust, Hope and Wessex Heartbeat also claim about 30 per cent of their annual income is a direct result of legacies.

Paul Herrington, director of the Wessex Cancer Trust, said: "I suspect that many people leave a gift to a charity to ensure that the benefits are distributed to a larger number of people many of whom are more needy. These sums have grown over the years and now represent a substantial part of total income. In 2001-2002 it provided more than a third of incoming resources."

Richard Radcliffe of London-based legacy specialists Smee and Ford suggests that some people like to write a clause in their will stating that should their estate come to more than the £255,000 nil-rate band for IHT, then anything above that should go to charity.

There are many ways of avoiding IHT. Most consist giving away annual sums of money (or gifts as they are termed), which can be done if it does not affect your lifestyle. Such gifts do not incur IHT if you survive them by more than seven years. But for charities, even the smallest IHT-free legacy can make a big difference.

Director Ray Kipling of the medical research charity Hope said: "We have even done a lot of work thanks to smaller legacies, such as supporting our Innovation Fund to open up new areas of medical research and to back the ideas of young doctors, nurses and scientists.

"This has had a big impact in starting over two dozen projects in the last two years. Modest legacies last year, one of £500 and one of £50, both from Southampton, are the sort of sums that help us in this work."

You can find out more information about leaving a legacy to charity by visiting the website at www.wessexwills.org.uk.

TO MAKE A WILL:

You need to be 18 to make a will.

When writing a will you will need to appoint executors. These will normally be family, friends or solicitors, who will ensure your will is carried out after your death.

Inheritance tax is paid six months after the end of the month in which the person died.

Many people will have life insurance and if the proceeds are paid into your estate when you die then the money could be liable to inheritance tax.

Only the original will is legally recognised.

A will needs to be witnessed by two people who are not beneficiaries.