Inheritance Tax

Inheritance tax was introduced in the 1986 Finance Act to take effect from March 1986. Inheritance tax was a replacement for Capital Transfer Tax which itself replaced Estate Duty. The statutory rules governing inheritance tax are contained in the Inheritance Tax Act of 1984.

Inheritance tax is charged on the value transferred by a chargeable transfer.

A "chargeable transfer" for inheritance tax purposes will either be a lifetime gift or a transfer on death. If an individual makes a lifetime gift, the value transferred by that gift may also be chargeable to inheritance tax.

Exempt transfers:

• Gifts to spouse
• Gifts to UK charities
• Small gifts: lifetime gifts of up to £250 to any donee in a tax year are completely exempt from tax
• Gifts on marriage, up to certain limits depending on the relationship between the donor and the donee
• Annual exemption, which reduces the IHT value of lifetime transfers only. The annual exemption is £3,000 per tax year

A potential exempt transfer is fully exempt if the donor survives 7 years from the date of the gift. It will become a chargeable transfer if the donor dies within 7 years of making a gift.

Inheritance tax is only payable if chargeable transfers exceed the Inheritance Tax nil band, which is £312,000 for the tax year 2008/2009 and £325,000 on or after 6th April 2009. The chargeable transfer in excess of the nil band will be charged to inheritance tax. The trustees will pay inheritance tax at the lifetime rate of 20%.

The inheritance tax rate as a result of death is always 40%.