Inheritance Tax is the tax levied by government on your estate when you die. Essentially it is a very simple tax - a charge of 40% is made on the net value of everything that you own above a designated threshold which is called the Nil Rate Band (commonly referred to as the NRB). Nowadays it is not just the very wealthy that will be liable to inheritance tax as the rises in property values alone have increased personal wealth considerably.

It is levied on the net value of everything that you own, including your main residence, any second property , any cash savings and investments you may have, cars, boats, personal effects (jewellery for example) and even the value of your life assurance policies.

Inheritance Tax Planning is becoming more important for families, as very large tax liabilities could arise on your death. This would mean that your family may not benefit as much as they should from your estate.

With careful planning and making full use of the various allowances and exemptions, your liability can be significantly decreased, all perfectly legally, through reducing the value of your estate over a number of years.

See our IHT rates and thresholds for current allowances, reliefs and exemptions that are available.

The Nil Rate Band

The Nil Rate Band (NRB) is the threshold above which Inheritance Tax is charged on an individual’s net estate value at the time of death.

Currently the NRB threshold for each individual for the tax year 2008/09 is £312,000 which will rise in stages to £350,000 in 2010/11. In addition, with effect from 9th October 2007, any portion of NRB unused when a spouse or civil partner dies may be transferred to the surviving spouse or civil partner and used when calculating their liability for Inheritance Tax when they die.

The actual amount of NRB to be transferred is calculated by assessing the proportion (as a percentage) of the NRB that was unused at the time of the first death and applying the same proportion to the current NRB available at the time of the second death.

So, given that any transfer of assets between spouses or civil partners is exempt from IHT, if a spouse or civil partner dies and leaves all of his or her estate to the surviving spouse or partner, the NRB threshold for the surviving spouse or civil partner would be double the then current individual NRB level.

Gifts and Associated Exemptions

Some gifts to certain beneficiaries are not subject to IHT. Others are subject to IHT but the rate of tax reduces to zero over a number of years through the application of what is called Taper Relief.

Gifts or transfers of assets to the following beneficiaries are exempt from IHT:

• Spouse/civil partner
• Charities
• Political Parties
• Universities
• Certain institutions for national purposes (for example the National Trust)

 
Potentially Exempt Transfers

Generally most gifts that do not fall into the above categories are considered Potentially Exempt Transfers commonly referred to as PETs. The IHT rate applicable to these gifts depends upon the number of years that have passed between the date the gift was given and the giver’s death.

The rate of tax to be paid has a sliding scale of relief applied to it over seven years which effectively reduces the rate to zero. This is called Taper Relief which is applied as follows:

Years before death	0-3	3-4	4-5	5-6	6-7	7
Tax reduced by	0%	20%	40%	60%	80%	100%

Note: Taper relief only reduces the tax payable where the total of gifts in the previous seven years is greater than the applicable Nil Rate Band.

Please refer to our inheritance tax calculator to find out the tax payable on the value of your estate.