can some one explain inheritance tax to me?

[sherbert]

I have been having a disagreement with my friend. I thought that inheritance tax was payable at 40% after 250,00 . However if a spouse dies (with or without a will) all assets are transferred automatically to the partner without any inheritance tax payable at all. My friend thinks this is payable not matter who inherits the money.

afaik it is not payable between spouses, although this still counts towards the valuation of the overall estate, but if there is no will the amount they automatically get to keep can be limited.

Does this help ? Threshold is now 300k.

You're right in that any money passing to the spouse will be exempt for IHT. You're wrong in saying that all assets are trnasferred automatically to the spouse. If you die intestate then others may inherit too (esp children). And if there is a will then the terms of the will will dictate the inheritance, though of course will can be contested.

Sherbert. There are two issues that you have been discussing: firstly the law relating to IHT, where jointly owned assets will pass directly to the surviving spouse without liability to IHT at that point and secondly the law on intestacy, where if you don't make wills your assets will be divided in a specified manner. The point of making a will is to ensure that your assets pass to the person you want to have them! If you want your DH or DW to inherit your assets on your death, making a will to that effect will guarantee that happening.
If you are not married, these rules (the law may soon be reformed) do not apply. IHT would be payable and you really do need to make a will!
For information on what happens if you don't make a will, see the DirectGov pages on Intestacy.
Perhaps a solicitor could clarify?

you can pass up to 1mill to spouse & its iht exempt - you can only pass up to the iht theshhold to anyone else and the balance over the amount is payable at 40% (unless its a charity). However you do have to take any lifetime gifts into account eg if you were paying premiums on a life policy for the benefit of your children then that counts towards the threshold.

kath H you can pass unlimited amounts to a UK domiciled spouse not just a million pounds.

what happens if one spouse is non-dom?

Also worth knowing that if a partner dies leaving his/her estate to spouse, then the spouse can set up a deed of variation of the will up to 2 years after the person has died. This can be used as a way of preserving part of the dead person's nil rate allowance. It's called a Discretionary Nil Rate Trust and so far hasn't been hit hard by changes to rules on trust funds.

sorry - yes you're right whole amount to spouse is exempt - got confused thinking about which IHT forms you have to use! Mind you, dh would be lucky to get a tenner from me! If you set up a Deed of Variation then it needs to be set up properly, HM Revenue & Customs dont like them and there was a recent case - Dr Fazackerley - where they went to court & won

Phizackerley was nothing to do with Deeds of variation - the issue was nil rate band discretionary trusts and the deduction of loans following previous inter spouse gifts.
NRBDT was set up by will in that case.

Re non-dom spouse - can leave first £55,000 free of IHT only - and will also have to cover lifetime gifts in previous 7 years. But also will have NRB of £300,000.