Inheritance Tax

Understanding Inheritance Tax

Below is a brief outline of some of the basic rules in relation to IHT.

The rate of Inheritance Tax is 40% – although it can be different in some circumstances. Inheritance Tax is the tax paid on the value of the assets of somebody who has died. Sometimes it is paid on transfers to trusts or gifts made during a person’s lifetime – but it is more commonly known as the tax paid when someone has died.

Standard Nil Rate Band

Each person has a tax free amount (‘nil rate band’) of £325,000. This means that when they die and their estate is valued, the first £325,000 is tax-free, and anything over that amount is taxed at 40%. Therefore, if your estate is worth £400,000, £325,000 will pass free of tax and £75,000 will be taxed at 40%.

Any assets left to a surviving spouse or civil partner are, however, tax-free – so if a wife leaves her whole £50 million estates to her husband, there will be no IHT payable on her death and her nil rate band is unused.

With spouses and civil partners, any proportion of the nil-rate band that is unused on the first death can be used on the death of the surviving spouse. By way of example:

If H dies first leaving everything to W his nil rate band is unused on his death, and on the death of W the nil rate band available for W will be increased by 100%. As it stands, this would mean that £650,000 nil rate band would be available on the death of W. The nil rate band available on the second death is increased by the proportion of the unused nil-rate band on the first death.