IN WHAT could be seen as a vote- winning move, the Conservatives this week pledged to raise the
inheritance tax (IHT) threshold from its current level of £300,000 to £1 million.
Rapid house price inflation means many estates in Scotland are now valued above the threshold and this, not surprisingly, has led to antipathy towards the "death tax".
HBOS estimates that the number of homes in the UK valued at more than £300,000 now stands at 1.5 million - 8 per cent of owner occupied properties. And this could rise to 4.2 million by 2020 if the IHT threshold increases only in line with retail price inflation.
Data from Skandia found that property accounted for about 43 per cent of the average estate liable to IHT.
But the map produced by Skandia shows Scots are in a better position than people in other parts of the UK. North of the Border, only those living in detached houses tend to fall in the IHT net, whereas in the south-east of England all home-owners do.
Where the value of an individual's estate on death falls within the "nil rate band" - below the threshold - there will be no IHT to pay on the estate. The tax is levied on death at 40 per cent on the value of assets in excess of the threshold.
In 2006-7 the Labour government expects to collect £3.6 billion in IHT. This is a substantial amount and if the Conservatives get into power and deliver on their pledge they would have to somehow recoup the lost revenue. To do so, they are suggesting non-domiciled UK residents pay a charge of £25,000. This would affect the likes of high-earners from overseas working in the City who may also have a business in their home country.
But there are disputes over just how many people are caught by the IHT net.
The government says only 4 per cent of estates in the UK are over the threshold, but research commissioned by Scottish Widows from YouGov on the nation's IHT liability calls this figure into question. Its most recent research published in April revealed that 7 per cent of Scottish homeowners had property valued at £300,000 or over.
The Edinburgh-based life company says each time this research is published, the government highlights that Scottish Widows is calculating the current liability whereas it bases its on data on current deaths.
Scottish Widows said: "We believe research is needed in this area as the estates of those dying today is no guide to how IHT may impact future generations."
Lee Smythe, director of financial planning at Killik & Co, said: "An increase in the threshold to £1m would benefit the majority of households in the UK and restore IHT to the original purpose of taxing only the wealthiest."
Many commentators have welcomed the Conservatives' proposals, which should enable people to pass on a financial legacy to their families rather than the tax man.
Bill Saunders, head of financial planning at the Acumen Group, said: "Rising asset values have resulted in more and more people becoming liable for this tax and we believe it's vital a fairer system is implemented.
"For a growing percentage of the population, the government has unintentionally become the primary benefactor of people's wills and the scheme outlined by George Osborne, Conservative MP, will go some way to addressing that.
"The proposed tax underlines the key values of the current system - to tax the wealthiest segments of society - and we would like to see legislation that returns us to that position."
Julia Whittle, principal at Punter Southall Financial Management, said: "Politics aside, I think this is an excellent idea for many categories of people. Under the current IHT scheme it has become a passion for people to pass as much money as possible onto their children, even to the detriment of their own income.
"But if the threshold was increased to £1m it may delay the current trend for parents to gift to their children at an early stage to mitigate IHT, so families may have to wait a bit longer for money."
Another issue is whether the Conservatives would be able to generate enough income from "non-doms" to cover the lost revenue from IHT.
Smythe said: "I would question whether or not the proposed tax on non-domiciled residents of £25,000 per annum would fund this completely, as the Tories suggest.
"Whilst there may be 150,000 to 200,000 people claiming non-domiciled status in the UK it is hard to imagine that the large majority of these would be in the position to consider £25,000 not a significant amount of money and simply pay without question."
But Whittle thinks a £25,000 annual levy on non-doms would not mean a great deal to the majority of them and they would be unlikely to leave the UK as a result. There is also the possibility that companies will compensate their employees for this charge. While the Conservatives have put forward the idea of the £1m threshold it is important to note that current rules still apply in the meantime, and individuals who may have an IHT liability should be looking at how best to deal with this.
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Investments, for example, offers a number of ways to mitigate IHT. One is property wealth management (PWM), which can enable the value of your main residence to be passed to your heirs without requiring you to move out of your home. There are three steps in this procedure.
First, you enter into a "home reversion" transaction. The market value of your home is agreed by an independent valuer and it is then sold to an "IOMA" home reversion fund. This fund invests solely in UK residential property and is available exclusively to PWM clents. Some of the proceeds are used to lease it back for the duration of your life rent-free and you retain the right to continue living there. The balance of the proceeds is invested in a unitised whole-of-life policy linked to the home reversion fund and converted into a liquid asset. This means you can give some or all of the units to children, grandchildren or others.
On death any remaining units in the home reversion fund will mature and their value will be realised. Those units that have been given away will be free of any IHT liability if you have survived for seven years after the date of the gift.
Bob Perkins, technical manager at Aegon-owned IFA Origen, said: "People should remember we are dealing with the reality of today rather than what might happen tomorrow. There are a number of steps people can take to mitigate their IHT liability."
