Inheritance Tax is applied to estates where someone has passed away including any Gifts, Assets or Trusts made within 7 years after death, or assets have been moved into a trust or company. However, not every estate will be subjected to Inheritance Tax as they could fall into the Zero Rate Band of Inheritance Tax Allowance which in 2008/2009 was set at £312000, the rest of the value of the estate would be taxed at 40%. The Nil Tax Band Rate is reviewed and amended on an annual basis.
How to Calculate Inheritance Tax
For example if an estate is valued at £450000.00 then on the 2008/2009 limit £312000.00 would not be taxed but £138,000.00 would be taxed at a 40% Rate which equates to £55,200 being paid in Inheritance Tax. All items of an estate are taken into account when calculating Inheritance Tax, even personal items taken from the home of the deceased, though there are some exceptions such as donations to UK charities.
Conditions of Inheritance Tax
* The deceased died in the UK.
* The gross value does not exceed 1,000,000.
* After the deductions of liabilities, Spouse or Civil Partner exemption and/or Charity Exemption, which is the net chargeable value does not exceed the Inheritance Tax threshold.
* Assets in a Single Trust must not exceed £150k unless the settled property passes to a Spouse, Civil Partner or Charity, where if this is the case the limit is waived.
* Foreign assets must not exceed £100k.
* The deceased has not made a Gift Reservation of benefit.
* The deceased did not have a Secured Pension Fund either as the original scheme member or as the dependant of the original scheme member.
* Specified transfers do not exceed £150k.
Inheritance Tax Payments and Transfers
Approximately 94% of estates actually do not fall into the Inheritance Tax brackets and so most of us actually never come across having to pay this sort of tax.
In 1975 Estate Duty was replaced by Capital Transfer Tax, which is now what we refer to as Inheritance Tax, nothing actually changed with regards to the terms and conditions of Capital Transfer Tax when it became Inheritance Tax except for the title given to it.
Also since late 2007 it has been announced that you can transfer your Inheritance Tax Allowance when you are married or in a Civil Partnership. This works in the sense that the first deceased would pass on their allowance to their partner, meaning that based on the 2008 to 2009 Inheritance Tax allowance and when the second person passes away they would have £624,000 allowance which would not be subject to inheritance tax, that is if all the allowance had been passed on to them of course and no other monies had been passed to children as if that was the case then the allowance would be reduced by that amount. Obviously the allowance would be higher if the inheritance tax allowance amount had been increased, and being as that by 2010 it is expected that the allowance will be raised to £350,000.00 this is more than likely.
As you can imagine Inheritance Tax has been met with some controversy as it has been deemed as unfair that people are still being taxed after death. This has been defended by others which think that it is actually a more fair tax as the deceased are no longer going to need their money and so it is a better tax than taking more from people who are still living and need their money.