Inheritance Tax: How Does It Work and What Changes Are Up for Discussion?

The Treasury is looking at ways to increase the money it collects through inheritance tax (IHT), sources have told the Guardian.

- Hilary Osborne

Ideas on the table include a review of the rules on giving away assets, with one possibility being a lifetime cap on how much someone can donate. Any changes would come on top of moves already made to close IHT loopholes.

What is inheritance tax?

IHT is a tax paid on someone's assets (property, possessions and money) after they die, but only if they leave enough to go above a certain threshold. The standard IHT rate is 40%, and it is charged only on the part of the estate above the tax-free threshold - currently £325,000 for an individual. However, the rules are complex and the threshold is different if a property is involved and can be higher if you are married or in a civil partnership and your partner did not use all their allowance.

What could be changed?

You can currently give away all your money and assets to your spouse or civil partner, charities or political parties, or to anyone else as long as you time it right. Otherwise, there could be an IHT bill for your estate when you die. One idea reportedly being considered is a lifetime cap, and anything above that would attract tax. This is the case in many other countries, including the US.

What does 'timing it right' mean?