Inheritance tax (IHT) is paid when somebody dies, but only if their estate – including any assets held in trust and gifts made within the seven years prior to death – is valued over the IHT nil rate band (currently £325,000 in 2009-10). IHT is paid at 40 percent on anything over this threshold.
IHT may also sometimes be payable on trusts or gifts made during someone’s lifetime.
Married couples and registered civil partners can increase the threshold on their estate when the second partner dies to as much as £650,000 (in 2009-10) by transferring the first spouse or civil partner’s unused nil rate band to the second spouse or civil partner when they die.
Generally speaking, IHT must be paid within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding.
IHT can be paid in annual instalments over ten years if the value of the estate is tied up in property, such as a house.
Typically, the executor or personal representative of the deceased person pays the IHT using funds from the deceased’s estate.
If assets are within, or have been transferred into, a trust, the trustees are usually responsible for paying IHT. Sometimes people who have received gifts, or who inherit from the deceased, have to pay IHT, but this is not common.
Seeking professional advice is a wise step to ensure that your financial affairs are as tax-efficient as possible.
For more information visit www.hmrc.gov.uk/inheritancetax/intro/basics.htm