Inheritance Tax on Gifts

Inheritance Tax (IHT) is said to be the only “voluntary” tax. As with inheritance tax mitigation, it is possible to reduce liability or remove it completely.

The Nil-Rate Band

The nil-rate band is the value of an moneyestate that is not subject to Inheritance Tax in the United Kingdom.

The current nil rate band values at £325,000 per person. Anything above the nil rate band can be subject to Inheritance Tax upon death. In other words, do nothing and 40p in every pound of your inheritance or estate may be winging its way into the government’s pockets so it’s important to understand just how tax mitigation can work.

 The importance of gifting

There is no limit to the number of assets that may be given away. A gift can be:

  • Anything that has a value, e.g. money, property, possessions
  • A loss in value when something’s transferred, e.g. if a parent sells a house to a child for less than it’s worth, the difference in value counts as a gift

7-year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on the value of gifts given in the 3 years before death.

Gifts made 3-7 years before death are taxed using what’s known as “taper relief”. Taper relief offers a gradual reduction in the amount of IHT due on gifts made during this period.

table

Any gifts made are not counted towards the value of your estate after 7 years and therefore the recipient will not pay tax on it.

Exempt Gifts

Annual exemption:

  • You can give away £3,000 worth of gifts each tax year (6th April – 5th April) without being added to the value of your estate.
  • Any unused allowance can be carried over one year.

When it comes to a Wedding or civil ceremonies, gifts that can be made to the happy couple include:

  • £5,000 from parents
  • £2,500 from grandparents
  • £1,000 per person from anyone else

You are allowed to help fund another’s living costs without tax as long as that person is:

  • An elderly relative
  • Child under the age of 18

Other:

  • Gifts to charities
  • Gifts to political parties
  • Gifts to community amateur sports club
  • Birthdays or Christmas presents

Regulations:

  • You must still be able to maintain your standard of living after making a gift
  • You can use more than one of these exemptions on the same person, e.g. a wedding gift and a birthday present.
  • Small gifts of £250 per person are unlimited during the tax year as long as you haven’t used another exemption on the same person and it remains within the £3,000 annual limit.
  • There is no inheritance tax on any gift married couples or civil partners give each other – as long as they live in the UK permanently.
  • If you’re married or in a civil partnership and your estate is worth less than £325,000, you can transfer any unused threshold to your partner when you die. This means their threshold can be as much as £650,000.

Any gift that does not fall into the IHT exemptions may be considered to be a Chargeable Lifetime Transfer or a Potentially Exempt Transfer.

PETs (Potentially Exempt Transfers)

Gifts of cash or assets worth more than the annual allowance will also be exempt as long as you survive for seven years from the date of the gift.

If death occurs within seven years, the value of the PET is deducted from the nil rate band resulting in a reduced allowance with which to offset the estate.

If an individual wishes to make a gift but is unlikely to live for an additional seven years, a life assurance policy can be taken out so that the gift can be made without fear of tax on death.

***

Opportunities for effective planning are plentiful. The most straightforward of these is by gifting assets to reduce the value of your estate.

If control is required over any gifted property including cash and liquid assets, it is advisable to consider a trust arrangement.

… and don’t forget we also now have the introduction of the Main Residence Nil Rate Band, which came into effect on the 6th April 2017. More on this in our next blog.

No comments yet.

Leave a Reply

Time limit is exhausted. Please reload the CAPTCHA.