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Homeowners see inheritance tax loophole hit

Property owners who have set up home-loan plans to avoid inheritance tax on their houses are set to loose their tax benefits because of hidden provisions that emerged after Gordon Brown's pre-budget report.

Experts estimate that between 20,000 and 30,000 families with properties worth more than the £255,000 inheritance tax threshold will be affected.

The story, run in several newspapers today, comes from deep inside the Chancellors pre-budget report last Wednesday and was not fully spelt out. However, accountants Ernst & Young have estimated that higher-rate taxpayers who have set up home loan plans and live in a house worth £500,000 face paying an extra £12,000 a year.

The inheritance tax loophole schemes work through a double-trust where parents sell their homes to a trust for an IOU, which is passed to their children through another trust. The parents then continue to live in the property but on their death the children are exempt from inheritance tax.

The loophole closure is retrospective and companies running the schemes expect up to 30,000 families will be affected.

Because of soaring house prices many people have fallen into the inheritance tax trap which shadow chancellor Oliver Letwin has called, “a tax on the rich, [that] has now become a tax on the middle classes.”