My Tax Form Info

INHERITANCE TAX: AN OVERVIEW-I

Quick stats

£3.8bn Amount raised from UK inheritance tax in 2007 (source: HMRC)

£1.9bn Unnecessary amount of inheritance tax paid each year by UK taxpayers because of poor planning, according to research conducted by Unbiased.

44,000 Number of estates that actually paid inheritance tax in 2007-08, according to HMRC.

What is inheritance tax?

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.

Who pays Inheritance Tax?

Not everyone pays Inheritance Tax on death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above £312,000 (2008-2009 tax year). It is only payable on the excess above this nil rate band.

Inheritance Tax nil rate band and rates

Inheritance Tax is charged at the following rate on death:

Exemptions

The taxman lets you give away a certain amount each year without it attracting inheritance tax, even if you die within seven years. The amounts have remained the same for donkeys’ years, but are still useful.

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 £312,000 nil rate band.

Most gifts made more than seven years before your death are exempt. You can give away £3,000 in each tax year (and carry over any unused allowance to the next year, but for one year only). You can make small gifts worth up to £250 each to as many individuals as you want in each tax year. And you can also make gifts out of regular income tax-free, so long as your lifestyle isn’t affected. Such gifts include birthday and Christmas presents, although some grandparents choose to pay grandchildren’s school fees under this exemption. Make sure there is clear, written documentation to prove the payments were regular.

The taxman also likes a wedding (including those involving a civil partnership), and allows you to give away cash gifts when a couple – your children and their partners, for example – ties the knot. Gifts to your husband, wife or civil partner are tax-free – this counts even if you are separated, but not divorced, and as long as you both live in the UK. Each parent can give a child up to £5,000; grandparents and other relatives can give up to £2,500; and anyone else can give up to £1,000. (…cont.)