Inheritance loophole to be plugged

The Treasury has become so eager to jump on tax loopholes that it is about to clamp down on one a year before it appears.

Government officials are drafting measures to stop pension law changes from letting people aged 75 or older passing on their family home and other assets to their heirs free of Inheritance Tax (IHT).

When the government first drew up its pension simplification rules - effective from 6 April 2006 - it did not appreciate the tax-planning opportunities it was allowing through the creation of an 'Alternatively Secured Pension' (ASP). People 75 or older would be able to take out an ASP instead of an annuity - and could put their home and other assets into this plan.

So long as they agreed to pay rent on the property, it would escape (IHT) when they died. However, the Treasury confirmed last week that the Inland Revenue is revisiting the issue - and it is clear that this potential loophole will be closed off.

Matthew Hansell, head of the private client department at law firm Mills & Reeve, is disappointed: 'It makes pensions a lot less attractive. More people will now be looking to invest outside pensions - in buy-to-lets, for instance - and will put in place separate IHT planning.'

Experts in the field see this issue as indicative and are expecting no major concessions on IHT from the Gordon Brown in the short term.

The 'nil rate band' of £263,000 is likely to be increased in the Budget, and there could even be a little tinkering at the edges. But the Labour leadership shows no signs of planning any kind of major restructuring of IHT.

Even the Institute for Public Policy Research (IPPR), which is campaigning for reform through a banding of IHT tax rates, holds out no hope of change before - or even after - a general election. Dominic Maxwell of the IPPR says: 'I would be surprised by any moves on IHT right now. It is a can of worms for the government, and it is quite a complex issue.'

On the other hand, it is not going to go away. The Conservatives have cited it as an unfair tax they want to scale back. They believe that Labour could be vulnerable here, and there are many in the Labour party who echo that view - but they do not appear to be calling the shots on this at the moment.