Inheritance tax
Inheritance tax as we know it was introduced by the
Conservatives in 1986 when it was set at a rate of 60%. However, two years
later it was reduced to 40%.
The tax was intended to hit only the very wealthy and until
recently, only a small percentage of estates had any inheritance tax liability.
With house prices having spiralled upwards, more and more
middle class families have found them dragged into the inheritance tax net.
The level at which inheritance tax becomes payable – known
as the nil rate band or inheritance tax threshold – has risen steadily over the
years and will continue to do so. It currently stands at £325,000 for 2011/12.
Inheritance tax is usually paid on an estate when someone
dies. It's also sometimes payable on trusts or gifts made during someone's
lifetime.
Inheritance tax
exemptions
Potentially exempt
transfers (PETs)
Most gifts to other people are classified as 'potentially
exempt transfers' or PETs. If you survive for seven years after giving the
gift, no inheritance tax is due.
However, if you die within this period and the gift valued
at less than the inheritance tax threshold, it will be added to the value of
your estate. If it's valued at more than threshold, the person receiving the
gift will have to pay inheritance tax.
But there's a further complication because if you die
between three and seven years after making the gift and the value of the gift
is more than the threshold, the tax payable will be reduced by taper relief.
Other exemptions include:
Gifts between
partners
Gifts between a husband and wife or civil partners are exempt,
providing they have their permanent home in the UK.
Charities
Gifts to UK established charities, national museums and
universities and other certain bodies will be exempt. Even gifts to political
parties, providing they are represented in Parliament with at least two MPs,
are also exempt.
Annual exemption
Each year you can gift away up to £3,000, either as a single
gift or as several gifts adding up to that amount. You can also used your
unused allowance from the previous year.
Small gifts
You can make small gifts of up to £250 to as many people as
you like. This can't be combined with the £3,000 above.
Wedding gifts
Gifts for weddings or civil partnerships are also exempt up
to a point. Up to £5,000 can be gifted from each parent of the couple, up to
£2,500 from each grandparent, £2,500 from the bridegroom to bride or bride to
bridegroom, and £1,000 from anyone else.
Regular gifts out of
income
Any regular gifts you make out of your after-tax income are
also exempt from inheritance tax. However, these gifts will only be exempt from
tax if you have enough income left over after making the gifts to maintain your
normal lifestyle.
