Inheritance tax
Biggest overhaul in more than 20 years

The rules on inheritance tax (IHT) received their biggest overhaul in more than 20 when the Chancellor announced that married couples would now be allowed to transfer their allowances to each other, doubling to £600,000 the amount that a husband or wife can bequeath without paying the tax.

Prior to the Pre-Budget Report, married couples could transfer an almost unlimited amount of assets to each other without paying IHT when one spouse died. But when the surviving spouse died, the estate was taxed at 40 per cent above the previous £300,000 nil-rate band. Now the surviving spouse will is able to bequeath £600,000 tax-free. By 2010, this figure will increase to £700,000. The new rules will also apply to people in civil partnerships.

The Chancellor also said he would backdate the rules so every widow or widower would benefit from the increased threshold. He said: “These changes mean certainty for up to 12 million married couples, with up to a £600,000 allowance rising to £700,000; the same entitlement for three million widows and widowers.”

The Treasury expects the proposals to cost £1 billion in 2008-09, rising to £1.4 billion by 2010-11. Mr Darling said that in future the threshold for paying inheritance tax would increase in line with house prices as well as inflation.

While death duty is relatively insignificant in tax terms, it is deeply unpopular among those who expect to pay it. More people are paying death duties because house prices have risen far more quickly than the IHT threshold.

Changes to inheritance tax

IHT allowance (the nil-rate band before the tax is paid) is now a combined allowance of £600,000 between spouses or between civil partners.

The IHT allowance rises to £350,000 per person in April 2010, giving couples a combined allowance of £700,000

Widows, widowers and bereaved civil partners can now claim the combined allowance.

The increased IHT allowance from April 2010 is not a tax cut, the £350,000 allowance was announced in this year’s Budget

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Levels and bases of, and reliefs from, taxation are subject to change.