Inheritance tax threshold raised

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Chancellor Alistair Darling has doubled the value of assets which couples can leave behind when they die without incurring inheritance tax.

Married couples and civil partners now have a combined threshold of £600,000, rising to £700,000 by 2010.

The move came a week after shadow chancellor George Osborne said only estates worth more than £1m would be taxed under a Conservative government.

But analysts said few would benefit from the changes to inheritance tax.

Tax director at KPMG, Carolyn Steppler, said that the change "although likely to grab headlines, is in practice only giving to most people what they already have".

Backdated allowances

Inheritance tax was previously charged at 40% on all assets worth more than £300,000 which are left behind when someone dies - though assets left to a spouse are exempt from the tax.

INHERITANCE TAX IHT is a form of death duty on estates It was set at £300,000 but has been raised to £600,000 for couples Above that threshold they are taxed at 40% About 40,000 estates a year are subject to IHT It includes the value of a house - unless it is left to a UK-domiciled spouse Assets given away in the seven years before death are subject to IHT

Mr Darling's said the announcement allowed 12 million married couples and civil partners to combine their allowances.

This means that when the second partner dies, inheritance tax will not be charged on the first £600,000 of their estate, provided none of the allowance was used when the first partner died - for example if assets were left to children or other family.

The benefit will be backdated indefinitely for widows and widowers, giving those who have already lost their partner the ability to take advantage of the combined allowance.

Mr Darling said 97% of UK homes were worth less than the new threshold.

And he added that in future years, both house prices and inflation would be taken into account when setting the level at which inheritance tax would kick-in.

It is clear that Darling wanted to address perceptions of rising public resentment towards inheritance tax Patrick Stevens Ernst & Young

However, some were sceptical about the impact of the changes.

"Many married couples will already have drafted wills to allow each spouse to take advantage of their nil-rate band. This was possible even for the family home," said KPMG's Ms Steppler.

"It is very disappointing to note that the proposals will not benefit unmarried or non-Civil Partnership couples, or siblings who have lived together."

Patrick Stevens, tax partner at Ernst & Young, said that the proposals had fallen "far short of what some had predicted".

"It is clear that Darling wanted to address perceptions of rising public resentment towards inheritance tax," he said.

"The proposals are cleverly targeted and will be a real attraction for many middle England homeowners."

Political battle

About 40,000 estates are currently subject to IHT and it brought in about £3.5bn to government coffers in 2006/7, official figures show.

This is more than 50% higher than the figure from five years ago.

However, this is much less than is raised through other taxes such as stamp duty on residential properties (£6.5bn in 2006/7).

Last week, Mr Osborne told the Conservative party conference in Blackpool that cost of increasing the inheritance tax threshold to £1m would be £3.1bn.

The plan helped the Tory revival, with many analysts seeing it as key in ending Labour's snap election plans.

A report by the Halifax in April this year found that more than two million homes - mainly in London and south-east England - were now worth more than £300,000.

It said that if trends continued, 4.3 million homes would be worth more than the IHT threshold by 2020.