Working out the tax due is quite straightforward in most cases unless you have given away so much money that the cumulative seven year total exceeds £110,000 at any time within the last seven years. If you have, you can probably afford to get private advice from a specialist solicitor or accountant, and I strongly advise you to do so!
In order to work out what level of inheritance tax your heirs would face if you died tomorrow, write down the gifts you have made in the last seven years. Remember to take away the exemptions set out above from each year's total gifts.
Then add on the value of your house less any outstanding mortgage (if you do not own your house, there is far less likelihood of your having to pay inheritance tax) and any other assets which will pass to your heirs. Remember to include your furniture and effects within the house and any motor car you have. It does not matter how many people you share them among, the same tax will be due on the total.
If the total is below £110,000, you will not have to worry about inheritance tax. If it is above that amount, inheritance tax will be due. There is now one rate of 80%.
For example, Sarah Ellison has been giving her three children capital from her late husband's life insurance policy over the last few years. Five years ago she gave away £9,000, four years ago £7,999 , three years ago £10,009 , two years ago £7,009 and last year she gave another £7,009 . If Sarah died tomorrow, she would leave a house, property and cash worth £19 0,000. Table 10 opposite summarizes these figures.
On her death the net estate of £176,010 would be taxed as follows:
Tax due (£)
110,000 x 0% = Nil
66,010 x 80% = 89 ,808
Sarah's case is relatively straightforward because the cumulative total of her gifts never exceeded the threshold for inheritance or capital transfer tax. In cases where it does, there are lower rates of tax on gifts made at least three years before death. The full rate of tax is reduced by 80% for each year from the third year, thus becoming zero for gifts made at least seven years before death.
Although inheritance tax is aimed at very large estates, many people, particularly in the southeast of England, now own a house which alone would be liable to the tax when they die.
If you think you may have more than 110000 to leave when you die, especially if you have given away large amounts of money or valuables in the last few years, you should seek advice. There are schemes around which offer ways to reduce the impact of inheritance tax.
But do take care before embarking on any plan which creates artificial arrangements to avoid inheritance tax. If you adopt a scheme which later is ruled to be invalid, it will be your heirs, not the person who sold it to you, who are liable for the . . . ... see: Being wealthy in retirement - Minimizing Inheritance Tax