Inheritance Tax

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Inheritance Tax is paid on estates worth over certain limits when somebody dies. Most estates fall out of the regime because they are valued below a threshold but as the tax is levied at 40% we need to check our position to protect our families. It's also sometimes payable on trusts or gifts made during someone's lifetime. 

The tax is payable at 40% on the amount over the 'nil rate band' which is £325,000 in 2009/10 for individuals. There's no tax on estates left to a spouse or civil partner and the nil rate band can be passed on to the survivor, effectively doubling the threshold.

Typically, the executor or personal representative pays the tax using funds from the deceased’s estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.

You can pass on assets without having to pay IHT using the following exemptions:

UK charity exemption. Any gifts you make to a UK registered charity during your lifetime or in your will are free of tax.

Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from IHT no matter what the value.

Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year to increase this to £6,000.

Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like.

Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from IHT is available.

And finally, one exemption that is often overlooked – gifts out of income. If you make regular gifts and your standard of living is not diminished, then these regular gifts are exempt. This is useful - for example grandparents might effectively fund school fees or university costs.

The Financial Services Authority does not regulate some forms of tax advice

http://www.hmrc.gov.uk/inheritancetax/intro/basics.htm