Explaining Inheritance Tax

By Meredith Parker
It is one of the few inflexible constants; everyone at some point will shuffle off this mortal coil and yet for somewhat obvious reasons most of us would prefer not to spend too much time thinking about it, let alone planning for it.

Unfortunately a lack of tax planning can cost dearly, and as one of the taxes we are subject to in the UK is 'Inheritance Tax' it is vital that in order to save our loved ones unnecessary expense we take just a little time to think about the time after we've gone.

Inheritance Tax is charged if you die with an 'estate' valued at anything over the threshold set by the Chancellor (for 2010-11 this was £325,000). Your 'estate' includes all cash in your bank accounts, investments, property and businesses, so Inheritance Tax will affect far more of us than most people assume.

When your estate is valued over the threshold set, Inheritance Tax is payable at forty per cent on the amount over the threshold.

Unfortunately simply giving everything away whilst you are still alive is not going to save your beneficiaries from this tax, unless you manage to do it seven or more years before you die, (so get that crystal ball ready), because gifts and trusts made during your lifetime are also subject. HMRC's rules do allow some ways for you to lower your heirs' tax bills by gifting, so talk to your accountant to find out more.

In certain situations Inheritance Tax does not have to be paid even when your estate's value is over the threshold; The Tax Man smiles for instance on nuptials, so leaving your estate to your spouse or civil partner will usually exempt it from Inheritance Tax, as will giving it as a genuine, not-for-profit, wedding gift.

If you are feeling charitable there will be no Inheritance Tax to pay for a UK registered charity if you bequeath your estate to them, and if you are lucky enough to be leaving a National Heritage Property or woodland to someone as part of your estate they will often find tax relief available to them.

Making a will can help your wishes for your estate be executed after you die but it is only sensible tax planning that will help limit the tax bills of your beneficiaries, and so it must be worth a visit to your accountant in order to save your loved ones from having to give the government a chunk of their inheritance. Nothing in life is as certain as death and taxes and sometimes they even walk hand in hand.