A CRACKDOWN on a favourite technique for avoiding inheritance tax will hit at least 100,000 families, accountants said yesterday.

The Chancellor announced plans to apply a triple tax to trusts set up to enable beneficiaries to avoid inheritance tax.

“Accumulation and maintenance trusts” are set up by parents and grandparents wanting to bequeath assets free of tax while preventing them from being squandered.

The action against the trusts is retrospective, forcing people to reorganise their financial affairs or leave their heirs with an unexpected tax bill.

Maurice Fitzpatrick, of the accountants Grant Thornton, said: “This is the big story of the Budget. Thousands of people in Middle England routinely use this technique each year. It’s quite commonplace among families with assets including homes in the £500,000 to £1.5 million range.” He estimated that “at least” 100,000 families would be affected.

The heirs of a £500,000 estate previously using the tax avoidance technique might have to pay an extra £20,000 in tax. In the case of a £1 million estate, the extra tax bill could amount to £40,000, Mr Fitzpatrick estimated.

Julie Morrison, of Ernst & Young, said that the trusts were often used to fund school fees. “The Chancellor has spoken of alleviating the inheritance tax burden for middle-income families yet is penalising those who thought they had secured a future for their family. The measure is retrospective for many trusts, laying to waste the carefully laid plans of a generation.”

The Treasury expects the measure to cost users of the trusts £15 million a year initially, but it is expected that the tax take would grow markedly over time.

Of the 700,000 people who die each year, 37,000 have estates that pay inheritance tax. The proportion is rising sharply, the boom in house prices having put more estates above the £275,000 threshold at which tax is now applied. The Chancellor’s measure means that assets put in to the trusts will be taxed at 20 per cent on the way in. The assets will also be taxed at 6 per cent every ten years. The final sting is an “exit charge” of up to 6 per cent when the beneficiaries take the assets out of the trusts.

Assets put into these trusts have hitherto been free of inheritance tax on the way in and the way out. Crucially, too, they have been able to grow in value without attracting tax.

Accountants said that the new regime would end the use of the trusts in most cases. Tax advisers have feared such a move. “Every year we warn it may be coming. Now it has arrived,” said Mr Fitzpatrick.

He said that because of the technique, inheritance tax has in the past been called a voluntary tax. “This will make it a lot less voluntary.”

The tax threshold will be raised to £312,000 in 2008-09 and to £325,000 in 2009-10, the Chancellor said. He has previously set the level at £285,000 for 2006-07 and £300,000 for 2007-08. Heirs pay tax at 40 per cent on all assets in excess of the threshold.

PRIOR WARNING

Accountants warn before each budget that the loophole might be closed