Inheritance Tax (IHT)

IHT is primarily a tax levied on an individual's estate on death. It also applies to certain lifetime transfers and to other transfers made within seven years prior to death.

IHT is payable on an individual's death by the personal representatives of the deceased's estate. The estate includes all personal property, for example a house and its effects as well as cash, stocks and shares etc.

If the deceased was domiciled or deemed to be domiciled in the UK, IHT will apply to all of that person's taxable property wherever it is situated.

However, if the deceased was domiciled abroad, then the tax only applies to property situated in the UK.

IHT on death is due and payable within six months of the end of the month in which death occurred although Probate will not be granted until the estimated IHT liability on the estate is paid. Any IHT due on land and buildings (including an individual's own home) can be paid by instalments over a period of up to 10 years or until the property is sold, if earlier. Late payments may trigger interest charges.

Inheritance tax is currently payable at a flat rate of 40% on the value of the estate that exceeds the Nil Rate Band, which is subject to annual indexation. Below the value of the Nil Rate Band, the tax is at a flat rate of 0%.

Tax Year	 Nil Rate Band	 Tax Rate
2008/2009	 £312,000		 40%
2009/2010	 £325,000		 40%
2010/2011	 £350,000		 40%

Please note that on the death of the second 'partner' any used Nil Rate Band available from the death of the first 'partner' is available as a percentage of the then Nil Rate Band.

Inheritance Tax Exemptions

A range of exemptions and reliefs is available within IHT legislation. The main ones are summarised below.

Transfers between spouses before or on death are exempt from IHT provided that the recipient spouse is domiciled in the UK. For a non-domiciled spouse, the exemption is limited to £55,000. However, if everything passes to the survivor on the death of the first spouse, IHT will be levied on the whole estate (excluding any nil rate band exemptions) on the death of the survivor including any gifts or inheritance received, unless action is taken to avoid this.

Lifetime transfers of up to £3,000 per tax year are exempt from IHT. Both husband and wife are entitled to separate annual exemptions. Where the full £3,000 exemption is not used in one year, it may be carried forward to the next provided that that year's exemption is first used.

Outright gifts of up to £250 in total, to each of any number of people each year are exempt from IHT provided that the total of such gifts made at any time in the same tax year to the person concerned does not exceed £250.

Lifetime gifts made regularly out of income each year are exempt from IHT provided that they do not affect the donor's usual standard of living. There is no upper limit on the amount that can qualify for exemption.

Gifts made in consideration of a marriage are exempt as follows:

Donor		Amount
Parent		Up to £5,000
Grandparent	Up to £2,500
Others		Up to £1,000

Lifetime gifts for the upbringing of children and the support of dependent relatives are free of IHT liability. Also exempt are gifts and bequests:

• To charities
• To political parties
• To universities
• For national purposes
•  For public benefit

Inheritance Tax Reliefs

Business relief
Relief from Inheritance Tax which is due on a transfer of relevant business property.
Types of property on which business relief may be available. These include:

• a business
• an interest in a business, such as a partner
• unquoted shares which are not listed on a recognised stock exchange
• shares or securities which give the transferor control of a business
• land, buildings, plant or machinery used wholly or mainly in the business or partnership

Agricultural relief
Relief from Inheritance Tax which is due on the transfer of agricultural property. The relief applies to the agricultural value of the asset only.

Woodlands relief
When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the trees and underwood (but not the underlying land) excluded from the deceased's estate. If the timber is later disposed of its value at the time will be subject to inheritance tax.

Gifting your Assets
There are two types of gifts or transfers that can be made during your lifetime:

• those immediately chargeable to IHT (or would be if not covered by an exemption), which are known as chargeable lifetime transfers;
•  those that are exempt from IHT unless you die within 7 years of the gift, (known as Potentially exempt transfers or PETS).

A running total is kept of chargeable lifetime transfers and no tax is payable on these or your wealth at death until you exceed the IHT threshold the Nil Rate Band.