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Roll Up For The Great British IHT Giveaway!

by Robert Lee,, London

25 January 2007

As more Britons are caught out by inheritance tax than ever before, due to increased wealth and rising house prices, new research has revealed that GBP103 billion (US$203 billion) will be given away to friends and family to avoid huge death tax bills.

The study, commissioned by YouGov Plc for pensions and investments firm Scottish Widows, shows that four in 10 (41%), or 10 million households, now have an estate liable for a 40% tax bill on their death – up from a third (34%) last year. Of these people, 43% have taken, or plan to take, steps to mitigate this bill, with 44%, or 1.2 million people, planning on giving away either a lifetime gift, or an annual gift to friends and relatives. The average amount people are prepared to gift is GBP86,000.

Almost half (47%) would like their gift to be used to help their relatives get on the property ladder. One in five (20%) want their beneficiaries to use the gift for their own retirement, and the same (22%) would like recipients to save it for their own children. However, almost a quarter (22%) would like the benefactors to use it to pay off their debts.

“IHT is a tax that 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," says Anne Young, tax expert at Scottish Widows.

Gifting is becoming an increasingly recognised way to avoid IHT, but remember few gifts are totally exempt. You can give GBP250 away to an unlimited number of people as well as up to GBP3,000 per tax year - these will all be exempt. In addition, if you live for seven years after making any other absolute gift, this will be exempt too. As a quarter of the recipients plan to use the money to pay off their own debts, it is obvious they could ill afford to pay additional inheritance tax on top," she explains.

Trusts are also a viable option for those wishing to protect their assets, and Scottish Widows finds that four in 10 people who intend to take, or have already taken, steps to reduce their inheritance tax bill have looked at the option of a discretionary will trust or a life assurance policy written under trust.

However, for the majority that haven’t considered this option, nearly a third (29%) admit to not knowing enough about them, and one in 10 has never heard of trusts.

Notably, a quarter (24%) say that they are now wary of putting money into trusts, and 6% has no faith in these products since the Government introduced the Finance Act 2006 which changed the way trusts are taxed.

“People want to leave their family with as much of their assets as possible, and although people are making headway in recognising this, they could still be facing a major problem. Education is needed on the different ways that people can leave their money to the next generation as tax-efficiently as possible," Anne Young continues.

"Trusts should be more popular than they are. Although people may be unsure how they work, they are a relatively straightforward way of helping to reduce, or perhaps set aside a fund to pay for, an IHT bill. People should not automatically dismiss this option, but rather seek professional advice and get a better understanding of the way trusts can help.”

The Scottish Widows research found the most popular actions people have taken to mitigate against inheritance tax are: making a will (62%); setting up a discretionary will trust (32%); visiting a financial adviser (28%); changing joint ownership of the home to tenants in common (28%); giving an annual gift up to GBP3,000 (23%); and making a lifetime gift to friends/relatives/charity/trust (21%).

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