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Family finances:
Inheritance tax

Inheritance tax is payable on death on the amount of a person�s estate (see Jargon buster) over the nil rate band, currently �285,000. On death, IHT is charged at the rate of 40%. There are a number of reliefs and exemptions available in addition to the nil rate band.

Jargon buster: Estate

Your estate is all your assets less all your liabilities as at the date of death. It includes everything owned by you, including your share of jointly held assets and any rights you have as the beneficiary of a trust. It also includes the proceeds from any insurance or pension policies paid out on death to your estate.

Inheritance tax can also arise on gifts or transfers of assets made during your lifetime (though most will be exempt if you survive for 7 years from the date of the gift). Discretionary trusts can give rise to inheritance tax at the lifetime rate of 20% on transfers in and out, and at a reduced rate of 6% every 10 years.

Exemptions

With the exception of gifts into a discretionary trust (which are immediately chargeable to inheritance tax if they exceed your nil rate band), most lifetime gifts which are not exempt are Potentially Exempt Transfers (PETs). They become exempt for inheritance tax purposes provided you survive for 7 years from the date of the gift. Should you die in that 7 year period the value of the gift comes back into your estate but any inheritance tax charge on the value is reduced on a sliding scale if the gift occurred more than 3 years before death.

Transfers between spouses are exempt. In this case the term �spouse� has its natural meaning and you will be regarded as �spouses� until you are divorced even if the marriage has broken down and you are not living together.

Donations to UK charities, political parties and certain national institutions are exempt.

There are the following annual exempt amounts for each individual:

�3,000 to anyone (if unused in one year it can be used the following year together with that year�s exemption)

Small gifts of up to �250 per person receiving the gift.

The following gifts are also exempt:

Normal expenditure out of income (gifts must be out of your income, must not reduce your standard of living and must be regular)

Gifts in contemplation of marriage (conditional on the marriage taking place)
�5,000 to your child on their marriage
�2,500 to your grandchild on their marriage
�1,000 to anyone else on their marriage

Financial provision for the education of your children under 18 or in full time education

Reasonable financial provision for the support of dependent relatives.

Reliefs

There are 4 main reliefs:

Business assets can attract 100% or 50% relief depending on the type of asset. The relief applies to businesses carried on for profit. Businesses dealing mainly in securities, land or buildings do not normally qualify.