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Inheritance Tax: Some background

When is Inheritance Tax paid?

The fundamental principle of Inheritance Tax is that when somebody dies all the property which they own (their personal chattels, their house, their cash savings and investments), or which they have given away in the previous seven years, will be valued and added up and from the total the excess over £325,000 (“the Nil Rate Band”) is taxed at 40%. There are a number of reliefs but the main exceptions from liability can be summarised as follows:

  • All property which passes to a spouse/civil partner or to a Charity is exempt from Tax regardless of value.
  • Some assets are exempt and will not be included in any tax calculation; typically business assets, agricultural property or woodlands.
  • Lifetime gifts more than seven years old will still be taken into account if the donor retained some interest or benefit in the property which
    was given away.
  • Certain lifetime gifts are automatically exempt and here the main ones are:
    • a gift or gifts to any number of individuals of less than £250 each in each tax year;
    • a gift or gifts totalling in aggregate no more than £3,000 in value per tax year;
    • gifts in consideration of marriage of up to £5,000 if made by a parent or £2,500 if made by certain other relatives or up to £1,000 if made by anybody else;
    • and gifts which can be regarded as normal expenditure out of income.

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