Inheritance Tax 
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Inheritance Tax
Related links:
TaxCafe Tax Guides
How to Avoid Inheritance Tax & Tax Planning for Couples
Chargeable Lifetime Transfers & Potentially Exempt Transfers
Gifts with Reservation of Benefit
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See the Articles & Advice section for a wealth of information on tax planning.Estate Planning - The Exemptions
The laws of intestacy will only provide for the minimum Inheritance Tax exemption. Writing a Will is one of the best estate planning tools to help avoid tax being charged on your estate, and a Will is a an excellent means of helping to utilise the other inheritance tax exemptions which are available.
Nil Rate Band
The main exemption available to each individual is the Nil Rate Band and the current legislation for the tax year 2008/2009 sets the threshold at £312,000. With the increase in value of assets, this exemption may not be as extensive as it first appears and assets - particularly the home - can result in the estate valuing way above this inheritance tax threshold. Inheritance tax is charged at 40% and the table below again shows how this could break down and the third column shows how much tax could result from your estate.
| Estate Value | Taxable Estate | IHT Tax @ 40% |
| £312,000 (less) | 0 | 0 |
| £327,000 | £15,000 | £6,000 |
| £377,000 | £65,000 | £26,000 |
| £427,000 | £115,000 | £46,000 |
| £477,000 | £165,000 | £66,000 |
| £527,000 | £215,000 | £86,000 |
The government introduced the concept of 'transferable nil rate bands' in October 2007. This means married couples and civil partners can enjoy two IHT nil rate band allowances (currently £312,000 each, thus amounting to £600,000) upon the death of the survivor of them.
Other Inheritance Tax Exemptions
There are however additional exemptions available; by making a will and doing a little bit of estate planning, there is increased opportunity to reduce the amount of tax paid (if any) thus ensuring that as much of your estate as possible goes to those who you intend. Below is a brief outline of the other tax exemptions which are available to mitigate the charge of inheritance tax. Be sure to read the Estate Planning Tips for further advice.
- Spouse Exemption - Absolutely NO inheritance tax is charged on transfers between married couples, irrespective of what form the transfer takes i.e. gift of an item or money.
- Annual Exemption - Everyone is entitled to give away up to £3,000 per tax year i.e. to a child or other relative Can be used over a 2 year period i.e. if you didn't utilise your exemption in 2003 you can bring it forward and use it in 2004 AS WELL as your 2004 exemption.
- Marriage Exemption - Gifts to marrying couples can also be exempt. Parents can give up to £5,000 per child upon their marriage, grandparents £2,500 to each marrying grandchild. Groom can give £2,500 to bride and vice versa. In addition, anyone can give up to £1,000 to anyone else, whether related or not. A point to note however is that the gifts must be given before or on the wedding day, not afterwards.
- Small Gifts - Anyone can make small gifts to anyone up to the value of £250 each tax year. This exemption applies to any number of such small gifts to separate persons each tax year.
- Maintenance of the Family - Anything you do for the maintenance of your family is exempt. This includes expenditure for the maintenance of your spouse and any expenditure for the maintenance, education or training of any of the following persons;
- A child of either you or your spouse who is either under 18 or still in full time education or training on the last 5th April prior to the time of the relevant expenditure.
- Any other child who is not in the care of a parent and is under 18 on the last 5th April prior to the time of the relevant expenditure.
- Any other child who has been in your care for a substantial period and was still in full time education or training on the last 5th April prior to the time of the relevant expenditure.
- 'Your child' for the purposes of this exemption includes a stepchild, adopted child or illegitimate child.
The exemption also includes the maintenance & care of a dependant relative which includes:
- Your widowed, separated or divorced mother or mother-in-law. An unmarried mother is also included if she is genuinely dependant on the donor even if she is not 'old' or 'infirm'.
- Any other relative of you or your spouse who is incapacitated by old age or infirmity, as a consequence of which they are unable to maintain themselves.
'Old' is usually taken to mean the State retirement age for men i.e. 65.
- Normal Expenditure Out of Income - Transfers of value are exempt if it can be demonstrated that;
- they are part of the normal, habitual expenditure of the transferor,
- that, taking one year with another, they are made out of income (i.e. not out of capital), and
- that the transferor is left with sufficient net income to maintain his or her usual standard of living.
There is no financial limit to this exemption provided the above criteria can be met.
- Potentially Exempt Transfers (PETS) - Any gift over the exempt amount can be given to a person by way of direct gift or investment, and provided the donor (person who gave the gift) survives for 7 years after the date of the gift. For further more detailed information on such transfers see Chargeable Lifetime Transfers & Potentially Exempt Transfers.
Inheritance Tax and estate planning can incorporate many of the above methods and tax exemptions. Another useful method is that of Life Insurance policies. For more details, and to carry out an online inheritance tax calculation, go to Inheritance Tax Calculator.
