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UK inheritance tax (IHT) nil rate threshold rises

As of yesterday, 6th April 2009, the UK inheritance tax nil rate threshold has been moved to £325,000 - up from £312,000. The rate of tax on the balance over this amount remains at 40%. The IHT nil rate band will increase again in 2010/11 to £350,000.

Inheritance tax (IHT) is essentially a charge on the value of all the assets of a person upon his/her death. The 40% rate applies to everything over the value of the nil rate band, i.e. anything over £325,000. It is also applied to the value of gifts made in the 7 years before death except between spouses and civil partners.

But civil partners and spouses together now have a nil rate band that is worth up to £650,000 at the current IHT rates and nil rate threshold.

Let’s say one partner died on 7 April 2009 and they leave a legacy of £70,000 to each of two children, then the sum of £140,000 is chargeable to inheritance tax. But this is below the £325,000 nil rate band, and therefore the legacies pass free of tax to the children with £185,000 of the nil rate band still unused. This can be transferred to the estate of the survivor. Let’s say the surviving partner dies in February 2011, then the nil rate band for that partner is £350,000 plus the balance carried over of £185,000 i.e. £535,000.

Advisers are saying that the current depressed economic conditions are a perfect time to reassess personal tax planning particularly in respect to IHT. Assets, properties and share portfolios transferred to children now, while prices remain depressed, will mean that any subsequent gain in value of these assets will fall out of the IHT net.

For example, say a share portfolio bought for say £200,000 two years ago is transferred now to someone at a value of £120,000. If then it subsequently regains ground to £200,000 in another two years time, then only £120,000 is considered for IHT purposes, as opposed to the full £200,000 if no transfer were to occur.