Inheritance Tax is the tax that is paid on your ‘estate’. Broadly speaking this is everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.
Not everyone pays Inheritance Tax on death, and with careful planning no one needs to pay it at all.
IHT only applies if the taxable value of your estate when you die is above £300,000, the nil rate band, (2006-2007 tax year) and is only payable on the excess above this threshold.
There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any Inheritance Tax being due, for example:
• if your estate passes to your husband, wife or civil partner and you are both domiciled in the UK there is no Inheritance Tax to pay even if it’s above the £300,000 threshold
• most gifts made more than seven years before your death are exempt (but see the next section on trusts and companies)
• certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and the recipient), gifts to charity, and £3,000 given away each year are also exempt
Many people just do not realise that when they die their families might have a large inheritance tax burden. The tax debt will have to be paid within six months of the person’s death and will have to be settled before assets can be disposed of. For many this leaves family members having to take out bridging loans in order to pay the inheritance tax bill.
The number of estates paying IHT rose by more than 70% in the five years to 2003/04. Estates valued at less than £500,000 accounted for 71% of those.
The tax take from IHT has nearly doubled since Labour came to power, rising from £1.7bn in 1996/97 to £3.3bn in the 2005/06 tax year.
I mentioned earlier that no actually needs to pay IHT, I run a will writing and estate planning business and consult with a large number of people a year, very few, when given the option of paying large sums of money to the government or being able to pass this money on to their children and loved ones have ever asked me to ensure the taxman gets their money.
