The first thing to say is that this is very much a specialist subject, so do get proper
professional advice before you do anything. Second, I always used to say to clients (and now
remind my wife and myself) that you should not give away too much to your children (or
anyone else) – just in case you might need it later … the dreaded care home fees etc.
This brief Post aims simply to spell out the structure of reliefs and exemptions, which you
can follow up in a bit more detail on pages 60 – 62 of my book (amplified slightly by the
Updates Tab on the website). And then of course by referring to any of a number of
publications.
So, to my Question: have you at least given some thought to the subject, even if you decide
not to do anything just yet?
The General Rule on Death
Subject to the exemption for gifts to a surviving spouse/civil partner, the value of your Estate
is totted up. That includes any chargeable gifts made in the seven years before you die, at
their date of gift value. If you do not have a United Kingdom (UK) domicile (which is the
country where you have made your permanent home), then, broadly speaking, only property
within the UK attracts Inheritance Tax. However, even if you are domiciled outside the UK
under the general law, you will still be treated as domiciled within the UK for Inheritance Tax
purposes if you have been resident here for at least 15 out of the previous 20 tax years – or if
you have been domiciled in the UK within the three years before your death.
The first £325,000 (the ‘nil-rate band’) of your Estate is free of tax, with the balance charged
at 40%. This is subject to ‘tapering relief’ on the rate of tax charged, where the gift exceeded
the nil-rate band of £325,000 and more than three years have passed since the date it was
made. In addition, there is a residence nil-rate band of £175,000 for a property which has at
some time been your residence and which is left to a direct descendant. If the chargeable
estate exceeds £2m, the residence nil-rate band is tapered until the point where the estate
exceeds £2.5m, when it disappears entirely. To the extent that either nil-rate band is not used
on the first death, the unused percentage can be passed on to the death of your surviving
spouse/civil partner.
There are five so-called ‘lifetime exemptions’. And then three/four reliefs and exemptions
which apply both to lifetime gifts and on death.
The Lifetime Exemptions
1.Potentially Exempt Transfers (PETs)
These are gifts of any amount to an individual which you as the donor survives for seven
years, in which case it becomes exempt. Death within that period makes the gift chargeable.
A gift must be absolute, that is the donor must enjoy (or ‘reserve’) no benefit from it.
2. The Annual Exemption
Gifts of £3,000 in total (to one or more people) in a tax year (6 April to 5 April) are exempt.
To the extent that the allowance is unused, it can be carried forward for one year only.
3. The £250 small gifts exemption
A gift of up to £250 (but no more) to any individual in a tax year is exempt. Note that this
exemption can’t be used in conjunction with the £3,000 annual exemption.
4. Normal expenditure out of income
A transfer will be exempt if (taking one year with another) it was made out of income, so as
to leave you with sufficient net income to maintain your usual standard of living, that is,
without resort to capital.
5. The marriage/civil partnership exemption
When a person gets married or enters into a civil partnership, the exemption for gifts to either
party depends on the relationship between donor and donee:
* £5,000 per parent (or step-parent)
* £2,500 per grandparent (or step-grandparent)
* £1,000 for all others.
A gift may be in kind as well as in cash. The gift must be an outright gift. And it can also be
in contemplation of marriage/civil partnership (to a particular person!).
Reliefs & Exemptions applying both to lifetime gifts and on death
1. The spouse/ civil partner exemption
This applies equally to lifetime gifts and inheritances following a death. The exemption is
limited to £325,000 for gifts from a UK domiciled person to a spouse/civil partner who is not
UK domiciled.
2. The charities exemption
This exemption applies to gifts on death just as to lifetime gifts. However, one advantage of a
lifetime gift is the possibility of Income Tax relief for Gift Aid: both basic rate recovery for
the charity and higher rate relief for the donor.
3. Reliefs for agricultural and business property
Subject to particular conditions, the gift of an interest in a trading business or of shares in a
trading company is likely to attract 100% Business Property Relief on market value in
computing IHT. If the business is a farm, a mix of Agricultural Property Relief and Business
Property Relief may well apply. The reliefs apply equally with lifetime gifts, though there is
then an additional condition.
Pensions
While a subject in itself, it should be said that if you are unfortunate enough to die under the
age of 75 there will be no IHT liability on your accumulated pension funds, though before 6
April 2023 when the lifetime allowance (of then £1,073,000) was abolished there could have
been Income Tax for the beneficiaries to pay if the amount exceeded your own lifetime
allowance. That said, there are proposals to reintroduce an Income Tax charge from 6 April
2024 except in relation to lump sums paid out within two years after the death (or, if later,
after the scheme administrator could reasonably have been expected to be aware of it).
Lifetime Giving through Trusts
Any gift to trustees of a (non-charitable) settlement is an immediately chargeable transfer (as
distinct from a potentially exempt transfer). This means that any balance over your available
nil-rate band (say £325,000) is charged to IHT @ 20%, which increases to 40% should you
die within seven years, subject to the ‘tapering relief’. This assumes that you and your
spouse/partner are excluded from benefit under the settlement.
But it does mean that if you want to make a gift and start reducing your chargeable estate, but
don’t want to make it to one or more individuals outright, you could use the protection of a
settlement, remembering the ongoing compliance (tax returns) obligations. So, given a clean
giving history sheet, you and your spouse/partner could give away over a 15 year period £1.3
million between you with no IHT consequences, saving £520,000 in IHT [viz, £325,000 x 4 =
££1.3m @ 40%].
Post-death Planning
While we do in this country generally have testamentary freedom, you should bear in mind
that a Will can generally always be ‘varied’ within two years of your death. The original
beneficiary can make a document to redirect the property to someone else.
Provided that the statutory provisions are followed, the substituted gift is written back into
the Will. This avoids the on-gift having any Inheritance Tax implications in its own right. For
example, an original donee child could redirect property to their own children (‘generation
skipping’), so that if that donee were to die within seven years of the on-gift, that would carry
no Inheritance Tax implications. Further, the rule does not apply for Income Tax purposes.
