Angela McMahon: A death in the family may hold a tax shock

PENSIONERS who use savings built over a working lifetime to maintain their standard of living complain that, since the financial crisis, they’ve been subject to a pincer movement through inflation and stealth taxes.

If true, then this double whammy is exemplified by the government’s intention to retain the current freeze on the threshold at which inheritance tax (IHT) becomes due until at least 2018. Inevitably, more people who do not consider themselves particularly wealthy will be drawn into the IHT net.

When a person dies, any assets he or she held worth more than £325,000 (double for a married couple) are taxed at 40 per cent. Since the then chancellor, Alistair Darling, froze the threshold at £325,000 in 2009, the sum has already lost 14 per cent of its real value – ie had the threshold kept pace with inflation it would now be £377,740. Presuming an annual inflation rate between now and 2018 of 2.5 per cent, the threshold would need to rise to £416,000 to equate to today’s £325,000.

However, while commentators tend to focus on the threshold, it is often forgotten that the £3,000 annual allowance – the sum an individual can give away in any one year and not have it assessed later for inheritance tax – was set in 1981. It is now only 29 per cent of the value it was then – had the allowance risen in line with inflation it would stand today at £10,422.

Although house prices have stalled since the onset of the banking crisis, huge increases in the decade before meant many people of relatively modest means faced the possibility that their estates may be subject to IHT after death, with consequences for their children.

The current threshold means that if a single, widowed or divorced person dies leaving a modest home worth £250,000, any other assets worth more than £75,000 will be liable for inheritance tax at 40 per cent. These assets are not restricted to savings and investments; personal items (eg car, leisure sailing craft, wine collection) are also considered part of the estate by the authorities.

So while you do not think of yourself as particularly rich, the taxman may have other ideas once you’ve gone.

• Angela McMahon is a senior solicitor with Murray Beith Murray.