Inheritance Tax - Basic Principles

Inheritance tax (or “IHT”) is quite complicated, but the basic principle is very simple: Inheritance tax  is paid on the value of someone’s estate, when he or she dies.

There are a few other circumstances in which inheritance tax can be payable*, but really they are just there to stop people avoiding the tax.

At current rates, the first £325,000 is free of tax, and the rest of the estate is taxed at 40%.

Here’s a simple example. Imagine a Mr. Smith dies, a single man, worth £1million.

Value of Estate               £1,000,000

             

Less: Nil band**               (£325,000)

             

Total                           £675,000

             

Taxed at 40%                    £270,000

* The two most common such examples are:

(a) gifts made into settlements during your lifetime; and

(b) gifts made within seven years of your death.

Also, trusts have an inheritance tax regime of their own.

** This tax free £325,000 is known as the ‘nil rate band’, or sometimes just the ‘nil band’.  It is usually increased each April, and the new figure is announced in the Chancellor’s annual Budget speech.