As the recent increase in house prices has shown, more and more people are being pulled into the inheritance tax bands which have been around for many years. While the current allowance is around about the £300,000 mark, i.e. you will not pay any inheritance tax (IHT) on assets under that level, many people have homes approaching that price, not to mention investments, insurance policies, etc on top. But why do you need to pay tax on your estate when you die? What is the reason behind it?

While Inheritance Tax only appeared back in 1986, it was affectively a rebranding of the old Estate Duty and Capital Transfer Tax although quite how the authorities thought a change of name would throw us off the trail remains to be see. There has been pressure on successive governments to reduce the impact of what is seen as an unfair tax – you pay your taxes in life and then you are charged again in death – but there has been no real change as yet. So why was it ever introduced?

A look back in history shows that even though there have been IHT laws since the 1800s, in the early days the tax was hardly ever collected. However, as time progressed and governments looked to raise more and more money, they soon realised that IHT as it is now, was easy pickings – after all who could really complain with the original owner of the estate dead?

Slowly but surely we saw the tax income from estates creep higher and higher, with more and more assets falling under the IHT regulations. The problem over the last few years has been caused by the massive increase in house prices (with some doubling in price in only 5 years) and a slower increase in the IHT “nil band allowance”, affectively pulling in more and more people. So what can the traditional UK tax payer do about the situation? How can they protect their estate for their surviving family?

It is taxes such as IHT which have encouraged a massive tax planning industry in the UK – not to be confused with tax avoidance (or so they say) – where ever more inventive schemes and ideas about how to work within the rules keep coming to the fore. However, as quickly as the experts find a way to take assets out of the IHT equation, it seems the authorities look to close any loop holes as soon as possible.

While tax planning was once thought of as only for the rich, famous and middle classes, the situation has developed a lot further since those days. More and more people are facing potentially enormous tax charges on their death, often leaving their surviving family with very little to inherit. However one thing is for sure, the recent proposals by the Tories and counter proposals by Labour have put the subject firmly back on the agenda.

When the next election eventually arrives, you can be sure that IHT will get more than a fleeting mention!