How inheritance tax works
Inheritance tax planningIHT is set at a flat rate of 40% on your death (or 20% if you make a chargeable lifetime transfer - your financial adviser will be able to tell you when this might apply). It's payable on the value of your estate above what's known as the nil rate band, which is set at £325,000 in 2011/12 and will remain at that level for 2012/13.
How IHT is calculated
Your estate is made up of everything you own, including your home, investments, any valuables and your share of any jointly owned items. Everything you owe, for example, your mortgage or a bank loan, is deducted from the value of everything you own to work out the net value of your estate. It's this net value that IHT could be payable on.
Transferring the IHT nil rate band
Recent changes to legislation mean married couples or couples in a civil partnership can transfer their nil rate band to their partner on their death.
This means any unused nil rate band from the first death can be carried forward and used when the surviving spouse dies on or after 9 October 2007. In the past, couples leaving their assets to their spouse IHT-free wasted one of their available nil rate bands.
The importance of a valid will
It's important to remember that, if you don't make a valid will, the law dictates who receives what from your estate when you die. This could mean that your estate won't be divided up as you would have wanted. For example, your partner wouldn't automatically inherit your whole estate.
Your financial adviser will be able to give you more information on what the law says should happen when someone dies without having a valid will in place.
This information is based on our understanding of current legislation, taxation law and practice, which may change. The value of any tax relief depends on the individual circumstances of the investor.