Inheritance Tax
Introduction > > Inheritance Tax
Inheritance Tax is a tax that is levied on your estate when you die and pass your estate to your beneficiaries.
It is calculated by working out the value of your entire world-wide assets*, and then levying tax as follows (for 2008/2009):-
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I.E. no tax on that part of the estate within the Nil Rate Band
Example - an estate of £412,000 pays £40,000 tax (The first £312,000 has no tax liability, the next £100,000 pays tax at 40%, hence total tax, £40,000).
Your estate includes all of your property, investments, home etc, (wherever in the world they are located), but for practical purposes it does not include business assets such as farms (where you are the owner occupier or tenant), unincorporated businesses, unlisted or AIM listed companies.
Business Property Relief may apply on a business asset if it has been held for 2 years and, where applicable, Agricultural Property Relief will also apply. To be fair however there is much devil in the detail and if you class yourself as a businessperson, entrepreneur or landlord you should have a full analysis carried out.
Warning - if you are in business with significant business assets it might well be true that you have little current liability. But you need to look forward and consider the position when you have retired. Will you be passing the assets on to the next generation, (so they won't be yours when you die), or are you more likely to sell them? If the latter then when you do die then your estate will be subject to IHT, and we should consider planning for that.
* IHT is levied on the global assets of UK Domiciled people. For more information see
Spouses and Civil Partners
Couples benefit from TWO Nil Rate Bands, so can exclude up to £624,000 of their estate from IHT.
Where people have (had) a spouse or civil partner then they EACH benefit from their own Nil Rate Band, and any unused NRB can be transferred to a surviving partner.
This is the case even if a first death occurred before this rule came into effect.
(Before October 2007 people could transfer their NRB, but they had to write their Will in such a way that this was done. The change of rule means that where people died without transferring their NRB, it is now treated as transferred automatically).
Widows/Widowers who remarried/reciviled and survived their second partner
When they die there is scope to include all three Nil Rate Bands, but the maximum benefit is capped at two NRBs
In practice this means that for estates that passed significant funds to people OTHER than the partner on the first or second death, there may be scope to benefit.
E.g. - Anne is married to John. On John's death everything passes to her. Anne then marries Peter, who has children. On Peter's death a NRB worth of assets is passed to his children, with the rest going to Anne. Anne dies – normally she would now have just one NRB left (Peter having used his, not transferred it) but in this case John's unused NRB is still available, so in Anne's estate 2 NRBs of value are exempt from IHT.
First Death before 18th March 1986
If the first death happened this far back, seek advice as tax rules were different then and the availability of any NRB will depend on the details of the tax treatment of the death.
The Most Common Inheritance Tax Mitigation Idea That Doesn't Work.
Giving something away but keeping it really. This comes in many guises, the most common being to try to give your house to your children while being allowed to live in it until you die, giving a valuable work of art to your children but actually keeping it on your wall, or putting money into a trust where it is possible for you to get it back out.
All of these ideas fall foul of the Gift With Reservation rule. Broadly speaking this means that a gift is not a gift if the donor retains any actual or potential benefit from the gift, ie the house as a home, appreciating the art, the ability to access the money.
Large Estates
These need to be looked at with great care. In essence the practical approach will be some or all of :-
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Giving assets away while alive, be it to Trusts, charities, friends or family. In short you can give away as much as you like to whomsoever you wish and if you live 7 years after the last major gift all Inheritance Taxes on those gifted assets will be avoided. That said, in disposing of assets by gift there may be immediate Capital Gains Tax implications. Also Trusts need to be treated with much more care than most people think (use the wrong one and its internal tax rate may obviate any apparent Inheritance Tax savings, or inflexible deeds may prevent you disposing of your assets as you wish). Advice and planning is essential.
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Providing for the anticipated tax liability by means of life insurance. The liability is estimated (net of any Will and Gift-based planning) and a life insurance policy is taken out that pays out the amount needed for tax. This is paid into trust and so falls outside the estate. This is most widely used where the estate comprises large assets whose sale or breakup is to be avoided so that they can be passed intact down the generations (typically a family property, art, antiques etc).
- Mitigation Plans. From time to time the insurance companies are able to create packages that manage to let you have some benefit from your assets while at the same time placing them outside your estate or in some other way enhancing your tax planning. It is fair to say that the Government is not keen on some of these schemes and so each Budget normally contains some loophole-closing legislation. Whether there are any current schemes suitable for you is something that can be discussed during our meeting.
If you have an estate for which Inheritance tax may be an issue it is important to seek advice and plan in advance. We will be able to assist you in this.
Last updated on April 11, 2008