THE demolition of recently-built homes at Sandbanks to pave the way for luxury apartments has highlighted a costly Inheritance Tax (IHT) pitfall.

When people die, IHT is usually based upon the value of their assets at that time. But for houses with large gardens the rules are different.

HM Revenue & Customs takes the view that the value placed on the property and land, for IHT purposes, should reflect potential for development, which they call hope' value.

Dorset and New Forest law firm Ellis Jones warns that those who inherit property - even if they have no intention of redeveloping - still face an extra financial sting.

It could be up to 20 per cent of the value of the property.

Ellis Jones solicitor Fiona Heald, who specialises in administration of estates, said: "Those living in prime development areas such as Lilliput or Sandbanks could end up paying heavy IHT for homes bequeathed to them - simply because of the potential value in that property.

"That's regardless of whether or not they intend to move in, redevelop or sell it on with planning permission.

"For a bereaved family this causes a lot of additional stress. They are usually very shocked and feel HM Revenue & Customs is unreasonably trying to get more money from them.

"Clients need to make sure that their wills are Inheritance Tax efficient and that when they die their executors use a solicitor who knows about this and is prepared to argue against the increase. It is also possible to use trusts."

Property valuers are asked to take into account any feature which might make it attractive to a builder or developer.

In past cases HM Revenue & Customs has asked the executors to obtain planning permission before they sell a property so that the sale price includes the added value.

But there is scope to appeal. In a recent case in which a beneficiary hoped to live in the property, Miss Heald was able to establish that the local authority would not grant planning permission if asked to do so.

The law firm argued successfully that IHT should, therefore, be based upon the property in its current condition at the date of death.