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Inheritance Tax

The basics

Inheritance Tax (IHT) may be payable on your estate when you die and also when assets or money is gifted into certain types of trusts. Some other gifts during one's lifetime may also be subject to IHT. The first £325,000 (at 2010/11) of the estate is exempt from IHT. This is called the 'Nil Rate Band'. In simple terms the assets in the estate are valued as at the date of death, the nil rate band (and any special exemptions) deducted and the remainder is taxed at 40%.

If a lifetime gift is taxable the rate is 20%.

The value of gifts made within seven years of death is added back to the estate for IHT purposes.

Exemptions:

  • gifts between spouses or civil partners (not between unmarried partners)
  • gifts to charities and political parties
  • gifts in consideration of marriage (or civil partnership) (within permitted limits),
  • annual gifts to the value of £250 to anyone and usual birthday gifts
  • other gifts up to £3,000 per year. Any unused allowance may be carried forward to the next year. The carry forward is for one year only.
  • gifts made out of income are also excluded. It must be shown that the donor had sufficient income to make the gift without affecting his usual lifestyle.

The spouse' transferable Nil Rate Band

When a spouse (or civil partner) dies, the percentage of the Nil Rate band which is not used up by their estate is available to set against the surviving spouse's (or civil partner's) estate when they die. Gifts between spouses and civil partners are exempt from IHT so, if, on first death, everything is left to the surviving spouse (or civil partner), none of the Nil Rate Band will be used up therefore when the surviving spouse (or civil partner) dies there will be twice the Nil Rate band available to set against his or her estate.

Potentially Exempt Transfers (PETs).

Generally gifts to individuals made more than seven years prior to death are not included in the estate for IHT.

Exempt Assets.

Shares in AIM-listed companies and in family trading companies are wholly or partially exempt from IHT if certain conditions are met.

This information shall not be deemed to be, or constitute legal advice. We are not responsible for any loss as a result of acts or omissions taken in reliance of this information.

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