The will to change (From Dorset Echo)

The will to change

9:00am Saturday 25th August 2007

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Every year tens of thousands of people face huge tax bills when a loved one dies. Inheritance tax is catching ever more people in its net, mainly due to soaring house prices. But there is a way you can legally alter your partner's Will after they have gone to help reduce your tax liability.

Since 1995, the price of an average house in the UK has more than tripled to almost £200,000. However, the inheritance tax (IHT) threshold has risen just 95 per cent in the same period, according to Halifax.

The IHT threshold, or nil rate band, is the value above which an estate may be liable for IHT when the owner dies. An estate includes the family home, car, investments, savings and heirlooms.

The current threshold is £300,000, but had it risen in line with house prices over the last 12 years it would now stand at £490,000.

Homeowners in London and the South East of England are particularly vulnerable. For the first time the average house price in London has broken through the £300,000 barrier, while in the South East outside London it stands at £250,000.

Even if your property is valued well under the £300,000 threshold, it is vital to consider how much the rest of your estate is worth.

"Planning what will happen to your estate sounds like a depressing thought, but what is even more depressing is the amount of tax your estate could be subject to if you don't start planning now," says Andrew Stead, head of wealth at Bradford & Bingley.

A common dilemma faced by married couples or civil partners is when one dies and their assets are passed to the surviving partner.

Although there is no IHT charge when this happens, the effect is to bump up the value of the surviving partner's estate: that means that when he or she eventually dies, there's a greater danger any heirs will face a large IHT liability.

Let's take an example: A husband and wife have Wills which leave everything to each other, and when the second partner dies it all goes to their children. They each have assets worth £200,000. If the wife dies, it doubles the amount her husband will eventually leave to their children. Anything over the £300,000 threshold is taxed at 40 per cent, so the taxman can look forward to collecting £40,000 of the remaining £100,000 when the husband dies.

The problem can be alleviated by the husband effectively "rewriting" his wife's Will. This is known as a "Deed of Variation" and can be used to divert the money elsewhere, either directly to the children or, if he needs the funds himself, into a discretionary trust.

The Deed of Variation must be put into effect within two years of the first death and all beneficiaries must agree to the changes. Making such arrangements can be complicated so it is imperative you consult a suitably qualified expert.

A free guide to inheritance tax, sponsored by St. James Place, includes advice, who it may affect and how. It may also help to reduce your liability. For your free guide, call: 0870 834 7572. Calls cost less than 8p per minute from a BT landline.

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