Can Inheritance Tax Be Voluntary?

Inheritance Tax is often described as a Voluntary Tax, because with careful planning nobody needs to pay this tax.  You are probably aware that the wealthy pay the least tax.

Inheritance Tax is paid at 40% on most assets passed at death to anyone other than a spouse, civil partner or charity in excess of a threshold set by Government each year.  The amount up to this threshold is known as the Nil Rate Band.  The threshold at present is £325,000.

Assets transferred to your UK domiciled spouse or civil partner are exempt for Inheritance Tax purposes, so however much you transfer to each other on first death, there is no tax to pay.  On second death, the combined estate is assessed for Inheritance Tax.

Since October 2007, a new rule known as the Transferable Nil Rate Band allows a widow/widower to claim the unused Nil Rate Band of the deceased spouse or civil partner.  This additional allowance is not automatic and entitlement must be poved to HM Revenue and Customs.

Co-habiting partners are not able to claim the Transferable Nil Rate Band and if all assets are passed to the surviving partner on first death, the survivor will only be able to pass on a maximum of £325,000 without Inheritance Tax becoming payable.

For deaths after 6 April 2017, an additional nil-rate band will be available for individuals with direct descendants who have an estate (including a main residence) with total assets above the inheritance tax threshold of £325,000.  This is the Residential Nil-Rate Band and is £100,000 in 2017/18, increasing by £25,000 each year until reaching £175,000 in 2020/2021.  There will be tapered withdrawal for estates with a net value of more than £2 million.

Assets left to UK charities will normally be exempt from Inheritance Tax.  There are reliefs available for some business and farming assets and some types of shares.  The rules around these are complex.

Without careful planning the same assets can be taxed several times.