Broadly speaking, on death, the market value of everything you own at death is added up. If you made any lifetime gifts within seven years of your death then, in principle, they too are added onto the value of what you owned at death. If that total exceeds £325,000 (the current “nil rate band”) then the excess is taxed at 40%.
For example, suppose the value of everything you owned at death was £300,000 and you had made a gift of £50,000 to, say, your children six years before your death. In that case the £50,000 gift would be added back to the £300,000 (your estate on death) = £350,000. That total of £350,000 less the nil rate band of £325,000 = £25,000. So, that £25,000 would then be taxed at 40% = £10,000 of IHT payable out of your estate.
But various transfers are “exempt” for IHT: in other words they don’t count for IHT purposes. In particular there are exemptions (in lifetime and on death) for transfers between spouses/civil partners (“the spouse exemption”) and transfers to charities.
So, if you leave your whole estate to your spouse/civil partner there will, generally, be no IHT on your death if he or she survives you because of the “spouse exemption”. And, moreover, your £325,000 “nil rate band” will not be used up on your death because transfers that are exempt do not use up the nil rate band.
Where the “spouse exemption” applies your unused nil rate band will (generally) still be available to be transferred to your partner’s estate on his or her death. If the survivor then leaves your combined estates to (for example) the children the combined estates would (generally) have to be more than £650,000 before IHT was actually payable.
Various exemptions also apply to lifetime transfers (only): for example the £3,000 “annual exemption”; the £250 “small gift exemption”; and the “normal expenditure out of income exemption”. These sorts of gifts are not added back to your estate on death even if you die within seven years of having made them.
As regards IHT planning:
you can make outright gifts to other individuals and, as long as you survive for seven years, those gifts will not be added back to your estate on death – no matter how big the gifts were.
You can also make full use of all the available lifetime exemptions and none of these gifts will be added back to your estate on death. Such gifts could, for example, fund premiums on life policies held in trust for the beneficiaries of your estate.
Subject to special reliefs for certain types of property (business and agricultural property) the scope for more adventurous IHT planning is nowadays somewhat limited. But it is worth looking at your whole situation in the round and seeing what might best be done.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Neil Mackenzie: firstname.lastname@example.org