GUIDE TO Inheritance tax
A tax for the rich?
When estate duty was first introduced, it was only paid by the seriously rich – it was a tax for the aristocracy. Increase in the value of property have made it much more democratic: a recent study suggested that over 3 million individuals in the UK now have estates over the threshold for paying the latest version, inheritance tax (IHT).
The rate of IHT payable on a deceased’s estate is 40% - that takes a sizeable chunk of the assets once the threshold is reached.
Chargeable estate in 2007/08 |
Tax liability |
£300,000 |
Nil |
£310,000 |
£4,000 |
£400,000 |
£40,000 |
£1m |
£280,000 |
A perfect tax?
Some people might argue that IHT is the perfect tax: you pay it only when your dead, so why worry? The money you would be leaving to your children is simply extra cash for them which they haven’t earned, so they should be happy with their 60%. If you believe that, you don’t need to do any planning for IHT.
An alternative view
Some people think they should be able to hand on their life savings to their children without the State taking a shovelful out. After all, State has had income tax while you’ve been earning it, so why should they have another go when you pass it on?
If that’s your view, read on. You will need to think about whether your estate is liable to IHT, and whether you can do anything about that.
What are you worth?
The starting point is to make a list of your assets. It’s the current market value that is charged when an estate passes on – not what you paid for things. House price inflation is the factor that has put so many people into the IHT bracket. The threshold is going up by an average of 5.25% a year for the next three years, but how much will the value of your house rise in that time? The Chancellor says that only 6% of estates pay IHT – you don’t want to be one of them.
Tax year IHT Nil band
2007/08 £300,000
2008/09 £312,000
2009/10 £325,000
2010/11 £350,000
What you are worth may not be obvious. You are allowed to take off debts you owe such as a mortgage on your house, but might they be paid off by insurance on your death? You may not think of your life insurance policies as “your wealth”, but they will count towards your estate if the proceeds are payable to your personal representatives.
Making a proper list and putting realistic values on it will give you an idea of the IHT that you would pay today, and it gives you some idea of what you might pay in the future.
