Inheritance tax: Thousands risk losing the family fortune

Thousands of Scots could land their loved ones with an unexpected inheritance tax (IHT) bill because they underestimate how much they are worth, experts have warned.

The house price falls of the past three years have given rise to complacency among Scottish homeowners, who assume the value of their assets now falls below the IHT threshold.

But after a rebound in share values and the freezing of the IHT threshold at 325,000 (650,000 for a married couple or civil partnership), many people face leaving their beneficiaries with a tax charge that could be easily avoided.

That is exacerbated by low awareness of the point at which IHT is payable and the amount that is charged. Research by Turris Wealth Management in Glasgow found that just 10 per cent of working people between 25 and 60 know the IHT threshold lies at 325,000 and that tax is paid at 40 per cent on the estate above that level.

Brian Steeples, managing director at Turris, said the low level of understanding suggested many faced what he called an IHT time-bomb. He said: "IHT is a minefield and you need to set your estate up to minimise a future tax penalty on your beneficiary. A family trust, for example, is a good way to do this, but you must seek advice."

Tax experts dealing with IHT cases say the biggest problems currently being encountered concern families who fail to take account of the value of their main home.

John McArthur, tax and trust partner at Gillespie Macandrew in Edinburgh, pointed out that even after a drop in the past two years the average Edinburgh house price is still over 205,000. With other assets added to that, many families are passing the IHT threshold without realising it.

McArthur explained: "With many middle-income families being hammered by the taxman, it is astonishing how many still leave themselves open to paying even more IHT than they need to by failing to draw up a will that takes appropriate account of the value of all their assets.

"Matters become even worse when the cost of nursing home fees is factored into the equation."

McArthur gave the recent example of a family paying 16,000 in IHT on the death of a second parent when they could have taken simple steps to avoid the bill.

The parents had written a will stipulating they each wanted to leave their half of their house and their share of their investments to their children.

However, they failed to take into account their 500,000 home which, added to investment assets of over 230,000, meant the children received 365,000. The 16,000 IHT bill, and a potential capital gains tax bill on the sale of their house, could have been avoided, McArthur explained."By leaving a will which creates a flexible life-rent trust for the surviving spouse, no IHT is payable at that point as transfers between spouses are IHT free."

Underestimating assets is not the only problem on the rise - not disclosing them at all also appears to be a growing problem.

Solicitors at Edinburgh family law firm Gibson Kerr believe many Scots are leaving their families less than they could because they are too coy about their savings and investments.

Scott Rasmusen, partner at Gibson Kerr, said: "It is very common for people to die without highlighting all of their investments to their families or beneficiaries.

"They may not feel comfortable telling their lawyer about the money they have, or else they just forget to tell their families about any accounts they have."

If a will doesn't include details of all financial assets, finding that money once the investor has died can be complicated. Rasmusen said: "In some cases, there can be tens of thousands of pounds lying in a savings account which rightfully belongs to someone - but they don't know anything about it, as the details have never been revealed to them."

One Edinburgh inheritor almost missed out on a 30,000 windfall recently because it hadn't been included in the owner's will.

"His family had absolutely no idea that it even existed and - because it hadn't been disclosed in the will - it could have just remained forgotten," said Rasmusen.

It was eventually tracked down through the Landmark Financial Asset Search, which helps solicitors identify lost or forgotten financial assets.

On this occasion, the investment was passed to the beneficiary, but only after a lot of legwork.

"Unfortunately, more often than not, these assets don't get discovered and inheritors miss out on assets that could be worth tens of thousands of pounds."