RISING house prices have put the focus back on to inheritance tax (IHT) in terms of the likely impact it has on an individual’s estate and from the government perspective of how the tax works and how much it brings in.

There are about 600,000 deaths a year in the UK and the Inland Revenue expects 34,000 estates to pay inheritance tax in 2004-5. Although reform of this tax has been the subject of much speculation in the approach to recent budgets, no substantial changes have been made.

The threshold of the nil rate band has been raised regularly by the rate of inflation in recent years to stand at £263,000 for 2004/5. This band represents the value of assets that can be given or inherited tax-free provided certain rules have been met.

Inheritance tax is subject to generous reliefs, enabling assets to be handed on to another generation in a planned way, including during the original owner’s lifetime, often with no tax at all being payable.

From a farming viewpoint, the most valuable reliefs are Agricultural Property Relief and Business Property Relief.

In assessing whether an estate is liable to pay any IHT, the total value (less debts) is assessed and the first £263,000 of assets is allocated to the nil rate band. Once this band has been used up, any value in excess of this is potentially liable to IHT at 40% unless it qualifies for one of the reliefs.

The effect of the reliefs is to reduce the value of the qualifying assets. Farmland can include woodland and buildings used by the farming business, although, strictly speaking, long-term woodland comes under another IHT regime known as deferral relief. Houses can include cottages, but all must be of a size and character appropriate to the farmed land and the Inland Revenue is increasingly interested in whether houses meet a number of tests in this respect.