Doubling of UK inheritance law threshold will not raise savings

A doubling of the inheritance tax threshold should be welcomed by middle Britain, but will not save prudent people a penny, experts say.

The government has been accused of a 'smoke and mirrors' move in raising the threshold at which inheritance tax (IHT) is paid to £600,000 from the current £300,000.

The tax, levied at a penal 40 per cent, is paid by people on their dead relatives' estates and has come in for fierce criticism in recent years, as the house price boom pushes more and more people over the threshold.

However, the change only applies to married couples and civil partners, who can already use a joint inheritance tax allowance of £600,000 through tax planning measures.

'Wonderful arithmetic'

Nigel May, tax principal at chartered accountant MacIntyre Hudson, said: "The chancellor has done some wonderful arithmetic here by adding together two allowances that already exist, and passing it off as doubling the allowance.

"This change simply gives a rubber stamp to prevalent practice in IHT planning." Previously, married couples and civil partners were able to arrange their wills so that each partner uses their allowance when they die.

On the death of the first partner, £300,000 could pass out of the estate for tax purposes through the use of a nil rate band discretionary trust.

This was possible without the need to sell the family home - generally people's biggest asset.

"This change, although likely to grab headlines, is in practice only giving to most people what they already have," said Carolyn Steppler, tax director at KPMG in the UK.

However, the move has eliminated the need for this type of IHT planning and experts said it would hugely benefit many people unaware of such strategies and make it easier for parents to pass on reasonable amounts of wealth to their offspring.

"This change is welcome because it will save couples the need to jump through hoops when planning their wills," said Ian Maston, director of inheritance tax at accountant Chiltern.

Chancellor Alistair Darling said the change would cut the number of estates falling into the IHT net to just three per cent.

The total allowance for married couples and civil partnerships will rise to £700,000 by 2010 and, in future years, the government will take into account both house prices and inflation when setting IHT thresholds, he added.

House prices have soared by 219 per cent since 1995-96, according to the Halifax, and the announcement ensures that the threshold - for couples who would have failed to take tax planning steps - has kept pace with house price inflation for many UK households.