Families in line for new inheritance tax raid

4 March 2011

Trusts set up by parents to transfer assets to their children could be hit by inheritance tax if proposals made to the government are accepted.

Many parents use trust funds to transfer money and property to their children without having to pay a chunk of tax to the government. Currently, as long as the parents live for seven years after the transfer, the asset is not subject to any tax when they die.

However, the Office of Tax Simplification claims the current tax breaks enjoyed by trusts are unfair and should be reviewed and that any review of tax must examine the loopholes that allow families to cut their inheritance tax bill.

The OTS, which was created by chancellor George Osborne in an effort to unearth tax reliefs in the UK tax system, found there are currently over 1000 reliefs in use.

Osborne is set to face criticism if he acts on the report. Before the election he assured voters that he would work to ease the burden on inheritance tax by raising the threshold from the current £350,000 to £1 million.

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Mike Warburton, director at Grant Thornton says inheritance tax is an inherently unfair tax. The poor don't pay it but the richest people can take ordinary sensible precautions to avoid it though lifetime giving – for example by transferring cash and assets to dependants throughout their lifetime without necessarily having to change their standard of living.

"The people caught by it are the prudent, the ones who save up, buy a house and prepare for retirement," he says. "It's the squeezed middle again."

Watch out for this inheritance scam

But Warburton says at present these are just suggestions and will not necessarily influence policy.

"This was a detailed, useful report and I am extremely in favour of the objective of tax simplification but this is not government policy," he says. "This is work in progress and things to look at in the future. It should not be used to set policy on Budget day on 23 March."

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