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Inheritance Tax

Inheritance Tax is usually paid on a deceased person’s estate. Sometimes, the tax is payable on trusts or gifts made in the last years before death. The Inheritance Tax is only due if the value of a given estate exceeds the current Inheritance Tax threshold, which is £325,000 in the tax year 2010-11. Currently, over 90 per cent of all estates avoid paying Inheritance Tax, mainly because their value is lower than the Inheritance Tax threshold.

 

Usually, the trustees, executors or beneficiaries are responsible for paying the Inheritance Tax.

Inheritance Tax thresholds and rates

The Inheritance Tax threshold called also “nil rate band” is the value up to which an estate is not subject to the Inheritance Tax.

 

Current Inheritance Tax thresholds 2009-10 2010-11
Standard Inheritance Tax threshold (tax-free amount) £325,000 £325,000
Combined threshold for married couples and civil partners: £650,000 £650,000
Inheritance Tax rates
Transfers on death or within 7 years of death 40% 40%
Chargeable lifetime transfers 20% 20%

 

Transfer made before death.

 

All transfers for instance gifts made within 7 years before death are added back into the estate of a deceased person to calculate the Inheritance Tax due. However, the Inheritance Tax on such transfers is gradually reduced as follows:

 

Years before death 0 – 3 3 – 4 4 – 5 5 – 6 6 – 7
Inheritance Tax reduced by 0% 20% 40% 60% 80%
Inheritance Tax thresholds from 6 April 2009 until 18 March 1986
From To Threshold/nil rate band
6 April 2009 – £325,000
6 April 2008 5 April 2009 £312,000
6 April 2007 5 April 2008 £300,000
6 April 2006 5 April 2007 £285,000
6 April 2005 5 April 2006 £275,000
6 April 2004 5 April 2005 £263,000
6 April 2003 5 April 2004 £255,000
6 April 2002 5 April 2003 £250,000
6 April 2001 5 April 2002 £242,000
6 April 2000 5 April 2001 £234,000
6 April 1999 5 April 2000 £231,000
6 April 1998 5 April 1999 £223,000
6 April 1997 5 April 1998 £215,000
6 April 1996 5 April 1997 £200,000
6 April 1995 5 April 1996 £154,000
10 March 1992 5 April 1995 £150,000
6 April 1991 9 March 1992 £140,000
6 April 1990 5 April 1991 £128,000
6 April 1989 5 April 1990 £118,000
15 March 1988 5 April 1989 £110,000
17 March 1987 14 March 1988 £90,000
18 March 1986 16 March 1987 £71,000
"Capital Transfer Tax" (Inheritance Tax thresholds) – 17 March 1986 back to 13 March 1975 - England, Wales, Scotland and Northern Ireland
From To Threshold/nil rate band
6 April 1985 17 March 1986 £67,000
13 March 1984 5 April 1985 £64,000
15 March 1983 12 March 1984 £60,000
9 March 1982 14 March 1983 £55,000
26 March 1980 8 March 1982 £50,000
27 October 1977 25 March 1980 £25,000
13 March 1975 26 October 1977 £15,000
"Estate Duty" (Inheritance Tax thresholds) - 12 March 1975 back to 16 August 1914 England, Wales and Scotland
22 March 1972 12 March 1975 £15,000
31 March 1971 21 March 1972 £12,500
16 April 1969 30 March 1971 £10,000
4 April 1963 15 April 1969 £5,000
9 April 1962 3 April 1963 £4,000
30 July 1954 8 April 1962 £3,000
10 April 1946 29 July 1954 £2,000
16 August 1914 9 April 1946 £100
Northern Ireland only
22 March 1972 12 March 1975 £15,000
5 May 1971 21 March 1972 £12,500
4 June 1969 4 May 1971 £10,000
22 May 1963 3 June 1969 £5,000
4 July 1962 21 May 1963 £4,000
1 November 1954 3 July 1962 £3,000
29 August 1946 31 October 1954 £2,000
16 August 1914 28 August 1946 £100
Main reliefs on Inheritance Tax

The main reliefs on the Inheritance Tax are as follows:

 

Business property: Relief amount
– business or interest in business property 100%
– qualifying shareholdings in companies unquoted on the Alternative Investment Market 100%
– land, buildings, machinery or plant used by transferor’s company or partnership 50%
Agricultural property 50% or 100%
Main Exemptions from the Inheritance Tax

Main Exemptions from the Inheritance Tax are:

  1. Most transfers between spouses and civil partners.
  2. Gifts in consideration of marriage or civil partnership of: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person.
  3. Gifts of up to but not exceeding £250 p.a. to any number of persons.
  4. The first £3,000 of lifetime transfers in any tax year plus any unused balance from previous year.
  5. Gifts made out of income that form part of normal expenditure and do not reduce the standard of living.
  6. Gifts to charities, whether made during lifetime or on death