Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime.
However, a certain amount can be passed on tax-free. This is also known as the ‘nil rate band’.
Everyone in the 2015-2016 tax year has a tax-free inheritance tax allowance of £325,000. The allowance has remained the same since 2010-11, and will stay frozen until at least 2017.
If you are single, the rate of Inheritance Tax is 40 per cent on anything above the threshold. The rate may be reduced to 36 per cent if 10 per cent or more of the estate is left to charity.
For example, if you leave behind an estate worth £500,000 the tax bill will be £70,000 (40 per cent on £175,000 – the difference between £500,000 and £325,000).
However, if you are married or in a civil partnership, you may be able to leave more than this before paying tax.
Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free and, since October 2007, the surviving partner is now allowed to use both tax-free allowances (providing one wasn’t used at the first death).
At the extreme, this effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning.
As well as on your estate at death, inheritance tax may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift.