THE Budget has seen the Chancellor, Gordon Brown, go some way towards addressing inheritance tax issues, with the announcement that the IHT threshold is to be increased from £263,000 to £275,000 from this month, says Christopher Hewitt, head of agriculture at Ward Hadaway.

Further increases will be implemented during 2006 and 2007, taking the threshold first to £285,000 and then to £300,000 - both above-inflation increases.

The substantial increase in the value of dwellinghouses in the last couple of years is welcome news for owners, says Mr Hewitt, but brings with it financial problems in the form of possible IHT liabilities.

This is even more so in the farming world where farms may include more than one dwellinghouse.

It is often thought that, on death, a dwellinghouse is free of tax but, unfortunately, some people get confused with principal private dwellinghouse relief, which is available only in respect of Capital Gains Tax.

The value of an owner's interest in the house is included in their estate for IHT purposes, unless Agricultural Property Relief or Business Property Relief can be claimed to reduce it.

There are, however, some traps for the unwary, says Mr Hewitt.

A farmhouse with, say, 300 acres may well attract agricultural property relief. If, however, the land is sold off, leaving only the house, relief may well be lost on the value of the farmhouse, thus perhaps costing as much as 40pc of the value of the house in taxation.

Many farmers are considering retiring and coming out of farming but, either mindful of the fact that they may lose agricultural property relief on the house if they sell or simply because they like to own the land around them, they often rent out the land on farm business tenancies.

The same problem arises, and agricultural property relief may well be lost on the value of the house, even if it land is retained.

It may in those circumstances be more beneficial to enter into some form of contracting arrangement in relation to the land and continue farming, rather than to credit a Farm Business Tenancy.

If a partner retires from the partnership and goes to live in one of the farm cottages, it is likely that no relief will be allowed on that farm cottage but, if he remains a partner and moves into one of the cottages on the farm, that house may still attract relief.

This should be contrasted with a retired employee, where relief may be retained whether he is retired or not.

Mr Hewitt explains that another trap arises in the tax treatment of let properties.

As farm cottages are required less and less for farm workers and as rents increase, farm cottages get let out. A let property by itself is likely to attract neither agricultural nor business property relief.

However, if the let property is clearly held as a partnership asset, i.e. part of the business, so long as the investment element constitutes less than the trading element in the business, including live and dead stock, it is possible to treat the house as part of the normal business assets and, in those cases, the investment assets may well attract business property relief.

When a farm cottage was worth, say, £80,000 it was often not a tax problem, even if relief was not granted to that particular dwellinghouse.

Despite the Chancellor raising the IHT threshold, values have increased so enormously it is very easy for an individual's assets to exceed the nil rate band.

It is, therefore, more important than ever that arrangements are made within the business to ensure that those business and agricultural properties are retained and maximised.