Inheritance tax (IHT) is a tax on your wealth at death and is deducted from your estate before it can be passed on to your heirs.
Broadly, anything over £312,000 will be taxed at 40% if you die during the 2008-2009 tax year.
There is no IHT liability on the assets you leave to your spouse, but once he or she dies, then the value of the joint estate in excess of the exemption is taxable.
Apart from the main exemption, there are several ways to mitigate your inheritance tax bill. For example, each year you can give away up to £3,000 free of CGT. If you didn't use last year's exemption you can add it to this year's.
It is possible to give away any amount in excess of this but if you die within seven years you pay tax on a sliding scale based on when you made the gift and the date of death. This arrangement, known as a "potentially exempt transfer" (PET), may be abolished in a future Budget.
If you have a share portfolio, you may also be able to use Business Property Relief to reduce your IHT. Shares that qualify for this relief include most of the AIM and OFEX companies, but you must have held the shares for a minimum of two years prior to your death for them to be exempt from IHT. If two years has not elapsed, the portfolio will be subject to IHT. Any subsequent capital gains made by the beneficiary are subject to CGT as normal.
If you anticipate a large IHT liability consider taking out a life assurance policy which will cover the costs when you die.
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