Experts answering common questions on inheritance tax

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What exactly is inheritance tax? I thought it was just for rich people.

Inheritance tax, or IHT, is a tax on your estate – the assets you leave when you die, including property, such as your home, and savings.

The first £325,000 of your estate, known as the nil rate band, is free from inheritance tax. Above that, IHT is levied at a hefty 40 per cent.

With UK property prices rising, the value of quite a modest home could tip someone’s estate into the IHT bracket. For example, in London the average home is now worth £409,000, according to Land Registry data released in February 2014, a figure well above the nil rate band, which is not expected to rise until 2018.

I’ve worked hard for my home and the money I’ve put aside and want them to go to my family, not the taxman. What can I do?

Married couples and civil partners can transfer their individual allowance so that when the first partner dies, their share of their home and other assets passes to the survivor.

On the second death, IHT will then only be paid on assets of more than £650,000.

Are there any other exemptions or reliefs?

Yes, you can take money out of your estate each year in the form of gifts, without any IHT consequences.

You can give up to £3,000 away annually. It can be given either as a single gift or as several gifts adding up to that amount.

And it you haven’t used all the allowance from the previous year, you can carry it forward.

You can also make small gifts of up to £250 to as many people as you like, tax-free, and gifts to people getting married or registering a civil partnership are also exempt, up to certain limits.

What about the seven-year rule?

Under this rule, you can give away assets to someone and it will be exempt from inheritance tax if you live for seven years after handing it over. This is known as a potentially exempt transfer.

Anything else I need to think about?

Inheritance tax planning is important but you also need to think about your needs in later life.

In other words, if you take money out of your estate, you also need to leave enough in so that you can continue to live comfortably.

This includes in the event of you or your partner eventually requiring long-term care in the future.

As you can see, inheritance tax is a complex issue, which is why it’s always sensible to talk to a qualified, professional adviser.