Inheritance Tax
It isn't the most famous tax we pay, but, as more and more families are finding out each week, it is becoming the most punishing. Inheritance Tax (IHT) is landing a growing number of bereaved loved ones with the biggest single tax bill that they have ever seen. On an estate worth £500,000 the IHT bill amounts to an eye-watering £75,200! For many, where most of the value of an estate is derived from the family home, the only way to pay such a large tax bill is to sell it, even if other family members are still living there. Making their loved ones homeless was certainly not the type of legacy the deceased had intended...
The Basics of IHT
IHT is a charge made against the 'estate' that a person leaves behind, where the net value of the estate (assets minus liabilities) exceeds £312,000. The figure of £312,000 represents the current 'Nil Rate Band' (for the tax year 2008/09), being the most a person can leave without IHT being applied. So for estates valued at less than £312,000, no IHT is payable. If any outright gifts were made by the deceased in the 7 years before their death, their value has to be added, which may push the value of the estate above the IHT threshold. In his last Budget, Gordon Brown confirmed that the Nil Rate Band would rise to £350,000 for the tax year 2010/11.
The 'spouse exemption' ensures that no IHT attaches to assets (without limit) that are gifted on death between spouses or civil partners. This presents good opportunities for longer term tax planning, notably where a couple have children and wish to minimise the effect of IHT on their eventual joint legacy. Most people believe that leaving all their assets to their spouse/civil partner is a good thing, but in fact the reverse is true, and the spouse exemption compounds this thinking. The most effective IHT planning occurs when both partners use their nil rate bands to the full, so that at least £624,000 is passed to their beneficiaries tax-free. The spouse exemption is put to best use only after the tax free 'nil rate band' has been exhausted.
