By: Priyanka Boghani
13 May 2010 Tell a Friend
What is Inheritance Tax?
Inheritance Tax (IHT) is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime, defined according to HM Revenue and Customs. Most estates don't have to pay IHT because they are valued at less than the threshold (325,000 GBP in 2010-11).
Typically, the executor or personal representative pays Inheritance Tax using funds from the deceased person's estate. The trustees are usually responsible for paying IHT on assets. In most cases, the IHT is paid within six months of the ends of the month in which the deceased died after which, interest will be charged.
Inheritance Tax Exemptions
Exemptions on IHT are only applicable in certain situations: when it's your spouse or civil partner's estate, when it's a gift made to a UK registered charity, or if the deceased owned a business, farm, woodland or National Heritage
property. Exemptions also apply if you survive for seven years after making a financial 'gift' to someone, when the gift is valued up to 3,000 GBP in the year, when it's a small gift of up to 250 GBP, or when it's a wedding gift. The IHT threshold or 'nil rate band' is the amount up to which an estate will have no Inheritance Tax to pay. Since 6 April 2009, the threshold has been at 325,000 GBP.
Inheritance Tax plans under the Coalition government
Although the Conservatives had pledged to raise the IHT threshold so it applied only to estates valued at 1 million GBP or above. However, in order to pay for the Lib Dem initiative of raising the income tax threshold to 10,000 GBP over a number of years, this plan has been postponed.
But is this a good idea? The Unbiased.co.uk annual Tax Action campaign aims to help people recognise their tax liabilities and take steps to avoid unnecessary tax payments. The Tax Action 2010 report was based on specially commissioned analysis of HMRC and other official data. According to the annual Tax Action report 2010 from Unbiased.co.uk, inheritance tax is Britain's second biggest tax wastage area. Over a third of consumers had supported the Tory pledge to raise IHT threshold to 1 million GBP.
However, despite the fact that we're not going to see changes to the Inheritance Tax banding any time soon, there are still steps that you can take to reduce your tax wastage in this area. The report outlines that UK taxpayers will waste nearly 2 billion GBP this year due to poor inheritance tax planning.