The following is a summary of the principal gifts that would be exempt from inheritance tax. Inheritance Tax is levied on death (40%), and some lifetime gifts (20%), less any ‘nil rate bands’ applicable (normally £325,000 per person):
Gifts to exempt beneficiaries
You can make gifts to certain people or organisations without any Inheritance Tax liability. These gifts can be in your lifetime or in your will:
- To a spouse or civil partner as long as they live permanently (domiciled) in the UK
- A ‘qualifying’ charity, normally one established in the EU or other allowable country
- Some national institutions, for example the National Trusts, universities and museums
- A qualifying UK political party
Up to £3,000 can be gifted in one year without any Inheritance Tax liability. This allowance can also be carried forward one year, but no more.
Certain events or smaller gifts are also exempt, often because of the reason for the gift or the way it is made.
Wedding/civil partnership ceremony gifts
- parents can each give cash or gifts worth £5,000
- grandparents and great grandparents can each give cash or gifts worth £2,500
- anyone else can give cash or gifts worth £1,000
An unlimited number of gifts can be made as long as the total gift to each person is less than £250. If the gift is over £250, the exemption is lost altogether, and may be potentially taxable unless it falls under another exemption.
Regular gifts or payments from normal expenditure
For many of our clients, this is a big one! Any regular gifts that are made out of income after tax, expressly excluding any capital withdrawals, will be exempt if they do not affect your standard of living. These could include, for example:
- Payments to a child/grandchild towards their monthly mortgage payments
- Annual contributions to an insurance policy
- Termly school fees
Potentially exempt transfers
Any gifts that are not exempt from the definitions above will normally become exempt after a seven year period after making the gift. These are known as ‘Potentially Exempt Transfers’ (PETs). If you die between three and seven years after making a gift, the tax due (important: not the value of the gift) reduces on a sliding scale.
Gifts into Trust
The nature of the trust will define the tax position when gifts are made. Generally speaking only the least flexible of Trusts will not be taxed immediately, with most Trusts being subject to Inheritance Tax at the time of the gift, unlike other gifts which are may only be taxed on death.
In the event of your death it will fall on your executors to sort our your affairs so it is a good idea to keep good records. It may sound morbid, but one of the best ways to do this is by actually keeping a roughly completed “IHT400” – the form that is completed and sent to HMRC (not in all cases) on death. This will give an indication of the sort of information they need. As always the above is based on our understanding of legislation and HMRC practice at the time of writing, we cannot be responsible for any action (or inaction), based on the above. Nor any errors or omissions. If you have any doubts please do seek relevant tax advice.