What is inheritance tax * rate bands * exemptions * avoid paying inheritance tax * calculator * death duties * writing a Will * beneficiaries * discretionary trusts

Inheritance tax is the last nail in your financial coffin, the final straw, the last insult that the tax man imposes on you after a lifetime of paying taxes. You don't actually pay inheritance tax, that responsibility is down to your heirs who are already feeling pretty rotten. Worst still, you don't even have to pay Inheritance Tax if you plan your estate properly. Sadly, most people don't do anything to avoid paying IHT and so the taxman takes his cut.

WHAT IS INHERITANCE TAX?

IHT (or inheritance tax to give it its full name) is a tax which is paid after you die if the value of your estate is greater than £300,000. This £300,000 figure is known as the inheritance tax threshold. Although this figure is correct at the time of writing, it should be noted that it is reviewed each year and is usually increased slightly each time.

You work all your life; you pay income tax, you pay tax on any income that you get from any money you have managed to save, you pay value added tax on virtually everything that you buy, you pay tax on your car every year, tax on the petrol you use, tax when you fly, duty on wines, spirits and cigarettes, capital gains tax on investments, you even pay tax on your funeral expenses.

Your "estate" is made up of everything you own: your house, money, personal possessions, shares, investments, etc, plus any life insurance (not written in trust) that pays out as a result of your death. How on earth you ever managed to acquire anything after paying all that tax is a miracle in itself.

From this you can deduct any debts - for example: credit card debts, loans that have not been repaid in full, funeral expenses, the balance of your mortgage - and the resulting figure is the net value of your estate.

INHERITANCE TAX RATE BANDS

If this net value of your estate is over £300,000 then inheritance tax is due at a rate of 40% on the amount over £300,000. So if, for example, your estate was worth £400,000 you would have to pay IHT of 40% on £100,000 - i.e. £40,000.

You have been taxed from the cradle to the grave and in fact afterwards because somehow, you managed, despite being taxed to death to actually acquire a little wealth. Then the taxman comes along and grabs a slice of what you had left. It's enough to make you turn in your grave.

Anything you leave to your spouse is exempt from IHT. So, if a man had a net estate of £400,000 but left it all to his wife, then no IHT would be payable. That sounds fair and sensible. However, when she died then, assuming she had not remarried, IHT would be due on any amount over the inheritance tax threshold at the time. Damn and blast.

Inheritance tax was introduced as a temporary measure during the Napoleonic wars to help fund the costs of fighting the French. Hang on a minute, didn't that end a couple of hundred years ago? At the time it affected only the very rich. Even as recently as 1997, only 1 in 40 estates were liable for IHT. But today, due to property increases, that figure is nearer to 1 in 6.

INHERITANCE TAX EXEMPTIONS

That caravan you own in Margate, is now valued at 38 million pounds and you are now paying the price for blocking our country lanes.

This is mainly because of the huge rise in house prices over recent years. Nowadays, even a fairly modest house is likely to be worth over £300,000 in many parts of the UK - thus meaning that more and more people are being caught by inheritance tax than ever before.

We also earn more money, have more spendable income, buy more property or other items like jewellery and cars and as we can't take it with us when we die, the chancellor, if we haven't planned properly or written a tax efficient will expects us to cough up again.

AVOID PAYING INHERITANCE TAX

It has been said that IHT is a voluntary tax. That is because, with the correct advice and planning, and the right type of wills, it is possible to organise things so that the inheritance tax bill is greatly reduced or even removed altogether.

You have been taxed to the hilt all your working life so why just hand the Chancellor another chunk of your estate if you can avoid it?

To find out more about how to make a will that helps avoid inheritance tax, please see our page about Avoiding IHT, or click here to talk to a professional will-writer about ways in which you may be able to minimise your inheritance tax bill.