It is likely that the changes in Inheritance Tax (IHT) announced in the October pre-budget report were motivated more by Chancellor Alistair Darling’s desire to steal the Tories’ thunder than a recognition of the true problem, namely that rising house prices have plunged many people of modest means into a tax regime originally designed to affect only the rich.

Be that as it may, the changes – hailed widely as a ‘doubling of the IHT nil rate band’ – were seized upon with great enthusiasm. On closer inspection, however, there seems less to cheer about than was first thought.

Firstly, the IHT nil rate band will not be doubled, except in cases in which two spouses or civil partners die in the same tax year. In other cases, the amount available on the second death will be the amount of the IHT nil rate band in the tax year in which the second death occurs plus an amount calculated on the proportion of the IHT nil rate band which was not used up on the first death. An example will illustrate how this works. Suppose a man died in September 1991, leaving an estate of £100,000. The IHT nil rate band for that tax year (1991/1992) was £150,000. Two-thirds of the 1991/1992 nil rate band was therefore used up on the first death. If the man’s widow were to die in the current (2007/2008) tax year, IHT would be payable on her estate above £400,000…the current nil rate band of £300,000 plus an additional one-third based on the ‘unused proportion’ remaining from the first death. The first problem arising here is that unless past records have been retained, it might be difficult to know what the value of the earlier estate was and hence the value of the unused nil rate band. This would be especially so if the value of the estate was low enough to make the filing of a return unnecessary. Also, where the IHT nil rate band was largely used up on the first death (and the nil rate band amounts were much lower in the middling past) the ‘extra’ relief could be rather small. In any circumstances, the maximum nil band available on the second death is twice the single nil rate band.

Secondly, the new limits will apply only to spouses and civil partners. Cohabiting couples (presumably because a review of the law relating to them is ongoing) obtain no benefit from these proposals and no nil rate band is transferred between them. Indeed, they will not even inherit each other’s estates unless they have wills.

Thirdly, the emphasis on IHT deludes many people into thinking that if they know they will not have an IHT liability, they will be able to pass their entire estate into the hands of their family, untrammelled by the state. Regrettably, for hundreds of thousands of families, this is merely false optimism. The spectre that faces many families is the rising cost of care for the elderly, which can destroy the wealth of a family of modest means. The reason for this is that currently (2007/2008) a person with assets exceeding £21,500 normally pays the whole of the cost of any long-term residential care they receive, which can amount to over £1,000 a week.

Says Mohinder Chima, “Our concern is that people will seize on the IHT changes as a reason for neither making a will nor undertaking planning to preserve family wealth and will unnecessarily end up transferring assets to the state, rather than their family.”