Inheritance Tax (IHT) may be payable on a person’s estate (the value of what they leave behind) after they die. IHT is paid after any debts and funeral expenses have been taken off. It's only due if the estate is over the IHT threshold (this is currently frozen at £325,000).
IHT is usually paid on an estate when someone dies, but may also be paid on trusts and gifts made during someone’s lifetime. Most estates don’t have to pay Inheritance Tax because the first £325,000 is exempt from IHT. This is known as the nil rate band, because tax is charged at 0%. Tax is charged at 40% on the amount over £325,000.
Anything left to a spouse or civil partner is exempt from IHT. When a spouse or civil partner dies, any unused part of their nil rate band can be passed on to their surviving partner. This is explained in the example below.
Arthur dies in May 2012 and leaves everything to his wife Enid. If she dies in November 2012, his £325,000 nil-rate band will be added to hers, meaning that her estate has a £650,000 nil rate. If Enid does not die in the same tax year as her husband, the amount added for Arthur’s nil-rate band will be the full nil-rate band for the year when she dies – not the figure at the time of Arthur’s death.
Gifts of up to £3,000 in each tax year are exempted from IHT, as are small gifts to individuals and some wedding or civil partnership gifts. Read the factsheet.