Are you at risk from property inheritance tax trap?

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Soaring house prices may be welcomed by people who plan to downsize or take some equity from their home in retirement. However, as they get older, they may be less positive about the huge bump in their housing wealth - because George Osborne's policies means they're increasingly likely to face an enormous tax bill as a result.

One in ten are likely to get a 40% tax bill.

Inheritance tax

The tax in question is inheritance tax. This kicks in when everything you own adds up to more than £325,000. Everything over this threshold is then taxed at 40% on your death. It means that families need to pay enormous bills before they can distribute the value of the assets - and in many cases this forces the sale of the family home.

The tax trap was once something that only the very wealthy had to worry about, but over the last few years house prices have soared - pushing more people into the tax bracket. In London, where the average property is now worth £450,000, the average family is going to find themselves stuck in this trap.

Now George Osborne has frozen the threshold for the next three years - pushing thousands more into paying the tax. The Telegraph calculated that by 2018, one in ten people will be liable for IHT - compared with 5% today. It said that this figure was verified by the Office for Budget Responsibility. The Daily Express highlighted that the number hit by this tax will rise 35% this year alone because of the freeze.

What can you do?

The good news is that married couples can double this allowance. All you need to do is make a will leaving everything to your spouse when you pass away (and they need a matching will). This will automatically mean that you leave them your allowance too. If a couple was to pass away in the next three years, this would double their allowance between them to £650,000.

Many older people considering making gifts to their loved ones before their death too. As long as seven years elapses between the date the gift is given and the individual passing away, the gift is considered out of their estate for inheritance tax purposes.

There are specific gifts which count as being out of your estate immediately - including the first £3,000 of anything you give away in any year, wedding gifts (up to a certain value), small gifts under £250, and regular gifts made out of income.

Another common approach is to take out a life insurance policy, designed to pay this tax when you die. This is a sensible and cost-effective approach, although Chris McNab, LV= Protection Manager, warns that people ought to consider putting these policies into trust (which can be done easily by the life insurance firm). He explains: "If a life insurance policy is put into trust, the proceeds will not form part of the policyholder's estate. This removes the risk of families potentially facing a 40% tax. It also means that they need not wait for probate to be granted before they can receive a pay-out."

It's difficult to discuss this issue with your family, because no-one likes to talk about death. The question is, which would you find least palatable: taking to your loved ones about their estate after they die - or paying 40% tax?