TENS of thousands of families are facing an unexpected tax bill as retrospective changes to the inheritance tax (IHT) rules come into force next month.

The new rules will penalise families who used the existing IHT system legitimately to minimise their tax bill, often paying thousands of pounds to advisers to set up trusts. These trusts will become worthless on April 6, under new rules on “pre-owned assets”, leaving families with a big tax liability.

Mike Warburton, director at Grant Thornton, the accountants, says: “The Inland Revenue says the changes are ‘retroactive’, not retrospective, but it is the same difference really. A lot of people made plans based on the law as it stood, and now it’s been changed.”

Here Times Money guides you through the IHT changes.

How does IHT work?

At present, any assets worth more than £263,000 are subject to IHT. Gordon Brown said in his Budget that this threshold would rise to £275,000 from April, but increasing numbers of people are caught by the tax because of house-price inflation. Under the IHT regime, assets left to surviving spouses are not liable to the tax. Other beneficiaries will pay 40 per cent on any assets above the threshold.

What’s changed?

The new rules are designed to close a “loophole” in the IHT rules which allow parents effectively to make a gift of assets to children while continuing to use them. The asset in question is normally a home, in which the parents continue to live.

Various schemes have taken advantage of this loophole, but the Government has decided to backdate its rule changes to 1986, rendering most existing IHT avoidance schemes useless.

What happens to families hit by the rule change?

The new rules mean that if you have set up an IHT scheme which falls foul of the pre-owned asset rules, you will have to unravel the trust or opt back into the IHT system, writing off the original advisers’ fees. The alternative is to pay an income tax charge set at 40 per cent of the market rate rental value of your home.

The rules come into effect on April 6, but you have until January 2007 to decide whether to stump up the cash for the income tax charge, or lose the IHT benefits. The latter option involves making an “election” to come back in to the IHT regime.

The decision rests partly on how old and healthy you are and on what type of IHT avoidance scheme you are in.

Which schemes are affected?

The new rules affect three main types of IHT schemes. The first, “Ingram” schemes, allowed homeowners to give away the freehold of their home while taking out a rent-free lease on the property for a set term. These schemes were outlawed in 1999, but many set up before this are still running.

A second type of plan is known as an “Eversden” scheme. These allowed you to put the bulk of your assets into a trust, naming your spouse as the main beneficiary. After some months, the spouse’s interest in the trust was revoked, passing on to the children. Both parents could live in the main asset — the house. As long as the spouse who was the original beneficiary of the trust lived for seven years, the proceeds of the trust would pass to the children free of IHT.

The third type, known as a home-loan plan, had a number of variations. Typically, a couple would sell their home on an “I owe you” (IOU) to a trust, of which they were the beneficiaries. They would pass this IOU to a second trust of which their children were the main beneficiaries.

What should I do?

Emma Chamberlain, tax barrister and author of Pre-owned Assets: Capital Tax Planning in the New Era, says that people with a home-loan scheme face most difficulties from the legislation, and will need advice to unravel the scheme. “While Eversden schemes are caught by the new regime, generally these schemes are fairly easy to unravel. Clients should not make an election, but simply take steps to ensure that the house is transferred back to the husband’s estate,” she says.

Yet children may be caught in the IHT regime if both parents die within seven years of the original gift, she says.

Those in Ingram schemes need to decide if it is worth paying the income tax charge to keep the IHT benefits in place. This decision will rest mainly on your level of health. Alternatively, you could move out of the property altogether, finding somewhere else to live.

The complexity of the rule changes mean most families caught by the new rules will need to pay for professional tax advice to work out what to do. These same families will already have paid thousands of pounds to advisers to set up the schemes in the first place.