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Who Pays Inheritance Tax?

Inheritance Tax is payable on the net value of any estate over 325,000 at a rate of 40%. The net value is after all allowable debts, expenses and exemptions have been deducted.

The main exemptions are:
  • A married couple can leave unlimited assets to each other without any tax being due. Furthermore any unused allowance can also be transferred, meaning that the surviving spouse can leave assets worth up to 650,000 tax free.
  • Gifts to charities or political parties (yes really) are also exempt.
  • Each individual can gift 3000 annually to anyone as well as an unlimited number of gifts of less than 250 each.
  • Parents can give 5000 to a child on the occasion of their marriage and grandparents can bestow 2500. We can all offer 1000 to anyone when they marry.
The 7 year rule:

Outside of these exemptions the 7 year rule applies. Put simply if we give assets to taxable individuals above our annual allowance then they only become 100 % tax free if we survive 7 years from the date of the gift. The process is staggered which means that after 3 years, we receive a 20% discount rising annually by 20% until after 7 years no tax is due.

How can I mitigate my Inheritance Tax Bill?

The most important word here is planning. Inheritance Tax has often been described as a "voluntary tax" meaning that much of it that has been, and will be paid is unnecessary. The donors involved simply did not give any thought to this issue and their families ultimately paid the price, and the revenue collected their winnings.

When the Queen Mother died she left an estate valued at 50 million pounds without any Inheritance Tax being due. Proof if proof where needed, of what can be done with thoughtful preparation.

Each individual situation is different, but generally they involve maximising allowances and careful use of trusts. However one thing is definite, everyone must make a Will as the first step in this exercise.