Avoid the IHT Trap
An Inheritance should not come burdened with the choice, “Do I sell, or take out a loan to pay the Inheritance Tax?” The IHT is a major burden for the middle class. As the law stands now, a person can inherit money, investments, property, and other assets to a total value of f £285,000 left by a single person, or £570,000 (2 x £285,000) left by a married couple.
A recent study revealed that the Treasury’s income from IHTs have doubled in the past eight years. In 1997-98 approximately 18,000 estates paid a total of £1.7 billion in IHT tax. In 2005-06 an estimated 37,000 estates will pay the Treasury will collect £3.2 billion. Most people will apply for a homeowner’s loan, or seek a secured loan to prevent being forced to sell their property.
After this threshold, the government adds a tax at 40 per cent. This means that if the personal assets are £385,000, IHT would charged 40 per cent on the excess £100,000, which totals £40,000. The spouse exemption is of little comfort to smaller families who will eventually leave the total assets to one or two children, who will be burdened with the tax.
People who inherit enough money to cover the tax can consider themselves lucky. Those who do not are in a bind. The government allows exactly six months, from the end of the month the person died in, to pay the tax. That is not much time to find £40,000, or to figure out how to pay the debt back when it is secured. For many people, the only option is to put the property up for sale, and hold off on paying the tax, even though it means incurring interest.