Most gifts made during a person’s lifetime are not subject to Inheritance Tax at the time of the gift.
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’. And there’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
Exempted gifts
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’, and you can carry any unused annual exemption forward to the next year – but only for one year.
Each tax year, you can also give away:
· wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
· normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
· payments to help with another person’s living costs, such as an elderly relative or a child under 18
· gifts to charities and political parties
You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
Potentially Exempt Transfers
Other gifts count towards the value of your estate and people you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death. These lifetime transfers are known as ‘potentially exempt transfers’ or ‘PETs’. These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.
The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned.
The effective rates of tax on the excess over the nil rate band are:
- 0 to 3 years before death 40%
- 3 to 4 years before death 32%
- 4 to 5 years before death 24%
- 5 to 6 years before death 16%
- 6 to 7 years before death 8%
- 7 or more years before death 0%
These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.
Example
Sally died on 1 July 2018. She was not married or in a civil partnership when she died.
Sally left 3 gifts in the 7 years before her death:
· £300,000 to her brother 6.5 years before her death
· £50,000 to her sister 4.5 years before her death
· £150,000 to her friend 3.5 years before her death
Sally is not entitled to any other gift exemptions or reliefs.
There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free.
£300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift.
The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold. That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%.
The £150,000 gift given to her friend is taxed at a rate of 32%.
Sally’s remaining estate was valued at £500,000 and charged at the usual 40% inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.
Gifts are not counted towards the value of your estate after 7 years.
Our advice
Make use of these IHT reliefs and exemptions if you can, if your estate is likely to suffer 40% IHT when you die. If you make lifetime gifts, we would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made from surplus income. For further advice on any IHT matter please contact Chris Mair or Michele Shapland.
