Inheritance Tax

Inheritance tax (IHT) is a combined gift tax and death duty that applies to gifts made during a person's lifetime, and to their estate on death. Under current legislation, the first £312,000 of a person's estate, including the value of any chargeable gifts made in the previous 7 years and less liabilities, is free of inheritance tax. This is known as the 'nil rate band'. Any wealth beyond this limit is charged at 40%. This means that an estate worth £362,000 will attract a tax liability of £20,000 whilst one of £1m will be burdened with a tax liability of as much as £275,200.

Transfers between spouses (either on death or by gifts) are exempt from inheritance tax with the frequent result that there is no tax due on the first death.

Certain exemptions and reliefs do apply. Gifts between spouses and to charity are exempt from payment of inheritance tax, as are transfers in certain circumstances of business/agricultural property.

Avoiding Inheritance Tax
There is anti-avoidance legislation to prevent 'gifts with reservation' from being effective. To give a simple example, you cannot gift your main residence to your children and continue to occupy it as if it had never been gifted. Such gifts are simply ignored when calculating the estate on death, i.e. the value of the property is added back into the estate.

Basic Planning

There are three ways to potentially reduce the effect of inheritance tax payable on death, as follows:

1. Make use of the nil rate band as far as possible by writing tax efficient Wills and equalise assets between spouses
2. Reduce the value of the estate by making lifetime gifts
3. Set up a life assurance policy that covers part, or all, of any liability that might arise, it is essential that this is subject to a suitable trust.

Inheritance tax calculator