Inheritance:

Inheritance Tax is a tax levied on gifts made by an individual in the seven years before death, and on the value of assets when he or she dies.

Put simply, inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime. However, a certain amount can be passed on tax-free, which we call the 'tax-free allowance'.

This is also known as the 'nil rate band'. Everyone in the 2010-2011 tax year has a tax-free inheritance tax allowance of £325,000. The allowance will remain the same for 2010-2015.

There are also a number of gifts that you can make during your lifetime or in your will that are also tax exempt. The most important of these are gifts between spouses either during life or on death, which are tax-free and gifts to charities.

Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free and, since October 2007, the surviving partner is now allowed to use both tax-free allowances (providing one wasn’t used at the first death).

At the extreme, this effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning.However, some people whose partner died before 21 March 1972 will be caught by a loophole.

Making a gift

As well as on your estate at death, inheritance tax may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift.

Gifts fall into four basic categories:

• Always tax-free irrespective of when you make them.
• Potentially tax-free (known as potentially exempt transfers or PETs).
• Taxable, but no tax due at the time the gift is made.
• Taxable, and tax is paid at the time the gift is made.

Who pays the inheritance tax bill?

Inheritance tax that becomes due on money or possessions passed on when you die is usually paid from your estate.

Basically your estate is made up of everything you own, minus debts such as your mortgage and expenses such as funeral expenses. However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due.

If they cannot or will not pay, the amount due then comes out of your estate.

Not all inheritance tax solutions are regulated by the FSA, if they are not then we will inform you in consultation.

The figures quoted are subject to change and our comments are our current understanding of the legislation and taxation as these rules can change.

For more advice on tax rates and thresholds, read the Which? Essential Guide: Tax Handbook 2010/11 click here..* For information from HM Revenue & Customs click here.*