The government's new tax aimed at preventing homeowners avoiding inheritance tax by passing on their homes while still living in them will be enforced next month.

Called the 'pre-owned asset tax', it works by taxing homeowners while they are still alive for the use of the property they have already passed on to their family in trusts.

It was feared this clampdown would hit those who have taken out equity release plans - but the government has now confirmed this won't be the case.

The plans are intended to tax people who have passed on their property early with the intention of avoiding inheritance tax but not to catch those who have genuinely given their property to an equity release scheme in order to obtain money to support their retirement.

Currently IHT is payable at a rate of 40 per cent on estates, the value of which is over the £263,000 nil rate band, although assets left between spouses are exempt if the couple are both domiciled in the UK. Even those with relatively modest homes can, therefore, find themselves subject to a tax that was previously perceived as only being a concern for the wealthy.

Once upon a time it was possible to give your estate away and if you didn't die within 7 years you and your family had avoided inheritance tax. This loophole was quickly blocked by the 'gifts with reservation tax'.

Since then it has been possible to use complex trust arrangements to remove your home from your estate but (and this was the clever bit) to carry on living in it without paying IHT when you finally expired. But with effect from April 2005 the new tax will mean you'll pay an income tax on the perceived benefit of living there.

Financial advisers say there are still many ways in which inheritance tax can be avoided through advance planning without just giving it all away.