Inheritance Tax is payable on Death on the value of the Assets Transferred to your Beneficiaries.
The Collector of Taxes will also include all Gifts made seven years before your Death. If you die within seven years, then there could be Tax to pay.
This is known as a "Potentially Exempt Transfer"
If you give your son £50,000 today, the money is "Potentially Exempt" from Tax. If you live for seven years there is no Tax to pay. If you die within seven years there will be Tax to pay calculated on a sliding scale. Everything between Spouses is Free of Tax, but on the Second Death, Tax is payable at 40% on everything over £650,000.
Gifts or Transfers which are exempt between Spouses.
* You can leave your entire Estate to each other and there will be no Tax to pay. Taxes are incurred on the Death of the Second Spouse.
* If the total value of the Deceased Estate (including Chargeable Transfers seven years before Death) does not exceed the Personal Allowance (which is currently £325,000)
* Gifts made over seven years before the date of Death.
* Lifetime Gifts which represent normal expenditure out of the transferrer’s income.
* A Gift of £3,000 each Tax Year.
* A Gift to any one person in any Tax Year up to the total value of £250.
* Gifts in consideration of Marriage. Wedding Gifts by a parent to his child are exempt up to £5,000, by a grandparent up to £2,500, and by most other people up to £1,000.
* Gifts for the Maintenance of Children or other dependant relatives are payable out of normal expenditure.
* All Gifts and Bequests to Charities.
* Gifts and Bequests made to certain bodies concerned with the preservation of the National Heritage or of a public nature.
* There are exemptions and reliefs for particular types of property, notably Business Property, Agricultural Land, Woodlands, Works of Art and Historic Houses.
How it is calculated?
* If someone dies with an Estate valued at £370,000 the Tax would be calculated as follows.
Estate Value £370,000
Less allowance £325,000
Estate Liable £45,000
Tax at 40% = £18,000 to pay
* Someone who dies with an Estate valued at £550,000 the Tax would be calculated as follows.
Estate Value £550,000
Less allowance £325,000
Estate Liable £225,000
Tax at 40% = £90,000 to pay
Note: With most Estates of up to £650,000 the Tax can be eliminated for Married Couples, as the Personal Allowance not used upon First Death is rolled over to the Surviving Spouse to be used on Second Death.