Continuing in our series of questions linked to Financial Planning, this quarter’s question concerns everyone’s favorite tax - IHT

I vaguely remember there being exemptions relavant for Inheritance Tax. Are there, and what are they?

First, let’s sum up the basics:

Inheritance Tax (IHT) is payable on an individual's estate at death at 40% above the nil rate band. (The value of the estate up to the nil rate band is taxed at 0%). For 2006/07 the nil rate band is £285,000.

The definition of the estate is the aggregate of all property to which the person is beneficially entitled. Note that the estate includes chargeable transfers made within seven years of death.

There are some exemptions that apply:

· Transfers between spouses. An estate or part of it left to a spouse is free of IHT provided they are UK domiciled. Otherwise, only £55,000 is exempt). This is the most widely utilized exemption from the tax.

· Gifts to Charities. These are exempt from IHT.

· Annual Gifts. Transfers of up to £3,000 per tax year are exempt. This can be carried forward for one year only.

· Small Gifts. In addition to the above, up to £250 per tax year to any one person are exempt.

· Gifts in consideration of marriage. Up to £5,000 by a parent of either marrying party, £2,500 by a grandparent or remoter ancestor, £1,000 by anybody else are all exempt.

In addition to the above exemptions, two reliefs are available for estates containing business property or agricultural property. These reliefs provide 100% reduction in the tax on those elements of the estate. Very valuable points for those estates containing these assets. There are numerous rules on what exactly is meant by business or agricultural property.

If a lifetime gift is made, not covered by the annual limits shown above, then this becomes a potentially exempt transfer (PET). If the donor survives seven years, then it becomes an exempt transfer. PETs are assumed to be exempt at the time of transfer so that no IHT is payable at that point. If the donor dies before the seven year period is up, then there is a tapering rate of IHT payable as follows:

• Under 3 years: 100%
• 3-4 years: 80%
• 4-5 years: 60%
• 5-6 years: 40%
• 6-7 years: 20%

The percentages refer to the proportion of the full rate of IHT payable on the gift, which is valued as at the date of transfer, not the date of death. Note, however, that the value of the gift, after taper relief has been applied, will still count towards the nil rate band. In other words, it will use up all or part of the taxable threshold first.

Trusts can be used, with at times, startling levels of tax-effectiveness, but the rules are too complex to go into here and will depend greatly circumstance to circumstance.

If you need advice with Estate Planning, make sure you go to an expert. Getting it wrong may not affect you, but it will affect those you leave behind.