Inheritance tax

 

Inheritance tax thresholds

Inheritance tax is a tax on your estate when you die (and on some gifts you made in the 7 years before death). However until your estate reaches a certain size anything below the tax threshold can be passed on without tax – this is called the ‘tax-free allowance’ or the ‘nil rate band’.  Also If you your spouse or civil partner is the beneficiary then they are exempt from tax and do not have to pay anything on your death. In the 2010/11 tax year the tax-free allowance is £325,000. This is likely to remain the threshold until at least 2014/15.

Inheritance tax rates

If you are not married and die with an estate of more than £325,000 (including money, property and investments but after deducting debts and expenses such as funeral costs), IHT at 40% is payable on the value of your estate above £325,000.

If you are married or in a civil partnership

As explained above if you are married anything your spouse inherits is exempt from IHT and in addition since October 2007 the surviving partner can make use of both tax-free allowances (to the extent that one wasn’t used at the first death). This means that if the nil rate band of the first spouse who dies is not used at all (say because their assets all went to the survivor and so no inheritance tax was payable) then the nil rate bands of the first spouse is added to the nil rate band of the second meaning her own threshold for tax on her estate has doubled and so she can give twice as much away without it attracting inheritance tax.

Tax treatment of gifts made before you die

If you die within seven years of making a gift inheritance tax may be due. However, you need only to consider making gifts if you think your estate might exceed the Tax threshold when you die. Also note if your estate is over the nil rate allowance any gifts you make more than seven years before you die will be exempt from Inheritance Tax. However, if you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate. However, if you die less than 7 years from making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate. If you die between 3 to 7 years after making the gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a tapering scale.

Giving away your home before you die

If you give property away but keep an interest in it e.g. you give your house away but continue to live in it rent-free – this gift will not be exempt even if the gift was made longer than 7 years ago. This is known as a ‘gift with a reservation of benefit’ and the gift will not be exempt from Inheritance Tax, even if you live for more than 7 years.

Selling your home and giving the money to your children

On the other hand if you sold your house and gave the proceeds to your children, the gift is exempt provided you live more than 7 years. However, if you move into their home other than paying a market rent there could be Income Tax consequences.

Who pays the inheritance tax?

The inheritance tax paid from your estate. Your estate is everything you owned, minus debts such as mortgages and funeral expenses etc. If there was a gift in the last seven years before death, the people who received the gift must pay the tax due.

 

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