Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Estates that are valued at less than £325,000 in 2011-12 don't have to pay Inheritance Tax.
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2011-12. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses. An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust. You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
- Spouse or civil partner exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave or gift to a spouse or civil partner who has their permanent home in the UK.
- Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will.
- Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount
Typically, the executor or personal representative pays the inheritance tax using funds from the deceased's estate.
