When a person dies, his financial estate is charged inheritance tax which is paid out of the estate by the executors of his will. There is a minimum limit of 325,000 pounds for which there is no inheritance tax. The amount above 325,000 is charged at a flat rate of 40%. So, for example a person leaves behind an estate whose value is 400,000 pounds, then he will be charged 40% of 75,000 which is 30,000 pounds. With the increase in property prices many people's estate exceeds the minimum limit and they have to pay inheritance tax.
There are certain, Inheritance tax allowances by which you can escape paying this huge tax, so that your heirs can enjoy the full wealth you are planning to leave behind. One of the inheritance tax allowances is that if you leave all your estate to your spouse it wont be charged any Inheritance tax, even if the value of property exceeds the minimum threshold. If you have children, then you can leave them the minimum limit amount to them, and the rest can be left for your spouse.
The minimum limit which is not charged any inheritance tax is called the nil rate band, as the rate is 0% on that amount. The nil rate band for 2009-10 is 325,000 pounds as previously stated. One of the inheritance tax allowances is that the unused part of the nil rate band can be used again by the surviving spouse when she dies. For example when the civil partner or first spouse dies, and the estate is valued at 162,500, this means only 50% of the nil rate band is used. When the second spouse dies this unused 50% can be added to the nil rate band prevalent at that time. Suppose the nil rate band is the same then the minimum limit is increased by 50% which makes it 525,000 pounds.
Among the inheritance tax allowances, there is the option of gifting assets to your relatives and friends while you are still alive. There are precise guidelines given for these kinds of transfers and the ones which are exempt from inheritance tax are called 'Potentially Exempt Transfers". These gifts have to be made before seven years from the date of death. If death occurs within seven years then tax is charged on a progressive scale with the gifts nearest the date of death are charged more tax.