Inheritance Tax – The Basics

Understanding the basics of inheritance tax planning and IHT thresholds can be crucial for your finances before and especially after the death of a loved one. Inheritance tax was introduced in the UK in 1986, replacing the Capital Transfer Tax. IHT doesn’t have to be paid by everyone, and around 90{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28} of all estates escape it, as the amount due depends on the total value of the deceased person’s assets.

What is Inheritance Tax? IHT is the tax to be paid on an estate when somebody dies, and includes all of the deceased’s assets, such as property, possessions, money and investments. Gifts made by the deceased within seven years before death are also taxable. IHT is normally paid by the executor or a representative of the deceased.

Inheritance Tax Thresholds Only estates valued above the IHT threshold are taxable. The IHT threshold is £325,000 in 2011-12 for a single person, while married couples and civil partners can increase the threshold upon the death of the second partner to £650,000. Those who do not fall into the nil rate band will have to pay tax at a rate of 40{bcb10712eadb32c7e50a15bcbfb14ed4d7108a9fa2a5dcafffbff4bd1d9a4f28} on the value of the estate above the IHT threshold.

IHT Exemptions It is sometimes possible to reduce the amount of the IHT payable, or avoid paying it even when your assets are above the IHT threshold through exemptions and reliefs that include:

  • Donations to UK-registered charities and donations to some political parties – Gifts made to UK charities during your lifetime or in your will are exempt.
  • Annual and small gift exemptions – You can give away up to £3,000 each year tax-free and give away additional small gifts of up to £250.
  • Wedding and civil partnership gifts – Tax-free gifts for weddings and civil partnerships range from £1,000 to £5,000.
  • Potentially exempt transfers – Gifts made more than seven years before the deceased’s death can also be exempt from IHT, regardless of the value of the gift.

Avoiding IHT – Inheritance Tax Planning Effective inheritance tax planning can be crucial to keep your assets within the family, protect your assets, and to reduce tax. Taking advantage of some of the exemptions can contribute to reducing your IHT, but you also have some other financial options. You can for example give your assets to trust funds or to a discounted gift trust which can ensure a stable income throughout your life.

Brittney Herbert

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