A guide to inheritance tax for beginners

Scott Woods.
Scott Woods.

In 1789, American statesman Banjamin Franklin wrote in a letter to French historian Jean-Baptiste Leroy: ”In this world, nothing can be said to be certain except death and taxes.”

Sometimes we see these two things as being simultaneous.

In simple terms, inheritance tax (IGT) is a levy on the money or assets a person leaves behind when they die.

It can also apply to some gifts that are made before someone dies.

When an individual dies, the property, money and other assets they leave behind (less any debts to be paid off) is known as their estate.

This estate is usually left to the friends and family of the person who has died and effectively becomes their inheritance. At this point, inheritance tax comes in as the UK government is potentially able to lay claim to a sizeable chunk of the value of an individual’s estate when he or she dies.

Of course, IHT is a tax that not everyone is required to pay as it is only due if the deceased’s estate is valued over the current IHT threshold which is £325,000.

The tax is payable at 40 per cent on the amount over this threshold.

If the estate is valued below this threshold, it falls within the nil rate band (NRB) and no IHT is payable.

What this means is that an individual with an estate worth more than £325,000 will be required to pay IHT at a rate of 40 per cent on anything above that level.

IHT might originally have been intended to help redistribute wealth from the rich back to the state, but now the NRB threshold, which affects who pays IHT, seems a little on the low side.

With property prices rising and more and more people having acquired wealth through savings, it is easy to see how a large number of people will find the value of their estates extending beyond the NRB threshold.