GORDON BROWN boasted of a budget for homeowners and pensioners when he raised the inheritance tax (IHT) threshold last week, but he failed to mention that tens of thousands of families face a tax crackdown on their homes in just two weeks’ time.

The government sneaked out final details after his pre- election budget. From April 6, the chancellor will catch people who have tried to shelter their family homes from IHT using complex trusts.

At least 30,000 families have set up these expensive trusts in the past few decades as rising house prices have pushed their estates into the IHT net. The schemes typically cost 1% of a property’s value, so it was common for advisers to pocket at least £10,000.

These families now face a stark choice: pay a tax penalty that could be in the region of £20,000 a year or leave their heirs to pay the IHT they have tried to avoid — rendering their expensive trusts useless. The chancellor’s decision to raise the IHT threshold will make little difference.

At present, your heirs must pay IHT at 40% on the value of your estate above £263,000. Brown trumpeted an increase in the limit to £275,000 from April and to £285,000 and £300,000 in the following two years. The rises were slightly above the usual inflation-linked increases. However, the typical detached home in the southeast is worth £398,249 — way above the new threshold.

Ian Luder of Grant Thornton, an accountant, said: “The chancellor has raised the threshold barely above the rate of inflation, and this in no way accounts for the rise in house prices over the last few years. Had the threshold been increased in line with house prices since 1997, it would now stand at £513,850.

“People caught in this latest inheritance-tax trap are not necessarily wealthy; many are pensioners who just happen to have seen their house price soar. They are being forced to make some very difficult decisions.”

The crackdown has also been criticised for being retrospective — trusts set up as far back as 1986 are caught in the net.

David Mackenzie, a retired businessman from Chesterfield, Derbyshire, set up a scheme to shelter his family home from IHT. He said: “I was extremely disappointed when the government first announced that it was changing the rules as the course of action I had taken was fully compliant with the previous Inland Revenue rules.”

From April 6, Labour will slap an income-tax charge, known as the pre-owned assets tax, on home-loan plans, family-wealth trusts and so-called Ingram schemes. These enable you to stay in your home rent-free while removing the value of your property from IHT.

With a home-loan scheme, also called a double-trust plan, you sell your home to a trust, which promises to pay for the property when you die. This debt is then gifted to a second trust, for your children. The value of the debt is deducted from your estate as long as you survive for seven years.

With a family-wealth or Eversden scheme you put a chunk of your home into a life-interest trust of which your spouse is the initial beneficiary, but from which you can also benefit. After about six months the trustees revoke your spouse’s life interest and hold it in trust for you and your children. As long as your spouse lives for seven years your children can inherit without paying IHT.

Ingram schemes haven’t been sold since 1999, when the government outlawed them. But plans in existence before the law was changed have been allowed to carry on. Under the schemes you gave away the freehold of your property but were granted a rent-free lease that allowed you to continue to live there.

Families will have four options. The first is to pay the income-tax charge and leave the scheme running so the home remains outside the IHT net.

Matthew Wakefield of Lee & Pemberton, a solicitor, said: “It may be cheaper to pay the income tax than run up a large IHT bill. That’s particularly true if you are elderly, in poor health and your scheme has been running long enough to ensure that you are outside the IHT net.”

The annual income-tax charge will generally be based on a notional market rent for the property. If you assume a rental yield of 5% on a £1m property, the annual rental income would be £50,000. A higher-rate taxpayer would pay 40% of that or £20,000 in tax a year.

The IHT bill on the same property would be £290,000 from April. On that basis, you would have to live for at least 15 years before you paid more in income tax than IHT.

You will have to declare the tax on your self-assessment form. The charge will not apply where the rental income is deemed to be less than £5,000, although it is thought you will still have to report it on your tax return.

A second option is to dismantle the scheme, in which case your heirs would still be liable for IHT. However, this may be impossible in some cases. You may not have the power to unscramble a trust, particularly where the beneficiaries are under 18. It could also be expensive, running into tens of thousands of pounds.

A third option is to make an election. You register with the Revenue to bring your home back into your estate for IHT purposes. A letter is all that is required; the Revenue must receive it by January 31, 2007. You don’t pay income tax but you lose all the IHT savings.

Although this sounds simpler than unravelling the scheme, the property remains in trust, meaning it is out of your control.

The fourth option is to move. Once you sell the property you are not liable for the tax charge and you can leave the scheme running to avoid IHT.

Before deciding on your options in this highly complex area, seek specialist advice.

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