When you die, the capital value of your net estate is charged to inheritance tax. Any debts incurred prior to your death are deducted from this sum, as are the reasonable costs of your funeral. There are currently two rates of inheritance tax payable on death. Firstly, £275,000.00 will be charged to inheritance tax at 0%. This slice of your net estate is known as the 'nil per cent rate band' or the 'tax-free band'. The balance of your estate is taxed at 40%.
A gift to your spouse (or civil partner) or a charity is not charged to inheritance tax, either on your death or during your lifetime.
Take, for example, a net estate of £550,000.00 owned between both you and your spouse (or civil partner).You have two children.Your Will provides that on the death of one of you, the survivor of you inherits all of your combined estate. On the death of the survivor of you, your estate is to be distributed to your children. Your estate will bear the burden of inheritance tax in the sum of £110,000.00.
Death of the first of you to die >
All estate passes to the survivor >
No inheritance tax
Death of the survivor of you: >
All estate to Children:
Estate of £5550,000 > IHT£
£275,000 taxed at 0% > Nil
£275,000 taxed at 40% > £110,000
IHT Liability is £110,000.00
Had you left your estate in a different way in your Will on the death of the first of you to die, under current rules, you could have reduced the inheritance tax liability on the death of the survivor to:- Nil