Inheritance Tax Rules and Limits

Although you won't have to worry about paying inheritance tax on your own estate (broadly, what you leave behind when you die) for the simple reason that you'll be dead, you may however may face an inheritance tax bill if you inherit money, property, or other items of value from someone else. At the time of writing, there would be no tax if you inherited from a husband or wife, or if the total value of the estate of the person you inherited from was worth £312,000 or less, and the death occurred in the 2008/2009 tax year.

If the total value were more than £312,000, whether or not you would have to pay tax would depend on two factors. First, it would depend on how the will was worded. If the will said that:

• your gift was 'free of tax' (or didn't amount mention tax at all), you should get the specified in the will and any tax due would be paid for out of what was left of the estate after all other gifts had been paid from it
• your gift was 'subject to tax' or 'bears its own tax' - there could be a tax bill.

Second, whether or not there would be a tax bill would depend on the taxable value of the estate. This is worked out by taking the total value of the estate, and then subtracting debts, funeral expenses, and tax-free gifts, including those to a spouse, charity, and/or political party.

To this figure would then be added the total amount of gifts that the person whose will it is made in the seven years before death less tax-free lifetime gifts, which would include:

• small gifts of up to £250
• wedding gifts worth up to £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else
• the first £3,000 of any other gifts made in each of the seven years before death.

If the resulting total were less than the nil-rate band of £312,000, there would be no inheritance tax to pay. If it were more than the nil-rate band, tax at 40% would be charged on the taxable value of the estate less £312,000. So if the taxable value of the estate came to £362,000, tax would be due on £50,000 - £362,000 minus £312,000.

These are the rules and limits that apply for the 2008/2009 tax year. Changes to inheritance tax rules, if any, are announced in the budget, and are generally featured in press budget reports.