Reduction of Estate through lifetime gifts
Christmas has sadly been and gone but don’t wait until next year to make gifts to loved ones particularly if you have a potential Inheritance Tax liability.
Inheritance Tax is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. This is called the “IHT threshold”. The rate of IHT is 40% on anything above the threshold but the rate may be reduced to 36% if 10% or more of the estate is left to charity.
An estate is exempt from IHT if the deceased left everything to their spouse or civil partner who lives permanently in the UK. Spouses and civil partners can give any value of gifts to each other during their lifetime without IHT being due on them. This is known as the “spouse or civil partner exemption”.
If someone leaves everything they own to their surviving spouse or civil partner it’s not only exempt from IHT but it also means they haven’t used any of their own IHT threshold or “nil rate band”. It is therefore available to increase the IHT nil rate band of the second spouse or civil partner when they die (even if the second spouse has re-married). Their estate can be worth up to £650,000 before they owe IHT.
A change in the IHT nil rate band from the 6th April 2017 is expected to enable many family houses to be passed from one generation to the next with reduced tax consequences. The existing IHT nil rate band of £325,000 will continue to apply but an additional nil rate band (£100,000 in 2017/18 and increasing by £25,000 each tax year until 2020/21) is expected to be effective from the 6th April 2017 on the transfer on death of a residence to direct descendants. The additional nil rate band is expected to be available if a person has downsized or ceased to own a home on or after the 8th July 2015 and assets of an equivalent value up to the value of the additional nil rate band are passed on after death to direct descendants.
If your estate is still going to be subject to IHT then you may wish to consider making the following gifts during your lifetime for which IHT would not be payable:-
The estate doesn’t pay IHT on up to £3,000 worth of gifts given away by the deceased in each tax year in the seven years prior to their death. This is known as the “annual exemption”. Leftover annual exemption can be carried over from one tax year to the next but the maximum exemption is £6,000.
There is no IHT due on individual gifts worth up to £250 so you can give as many people as you like up to £250 each in any one tax year but you can’t give someone another £250 if you’ve given them a gift using a different exemption e.g. the £3,000 annual exemption.
You can make a gift of any amount if it is part of your normal expenditure out of your income and you can prove that after having made the gift you had enough money to maintain your normal lifestyle.
There is no IHT payable on a wedding or civil partnership gift worth up to £5,000 given to a child, £2,500 to a grandchild, and £1,000 given to anyone else.
Gifts to charities, qualifying political parties, national bodies for national purposes, community amateur sports clubs or for the establishment of maintenance funds for historic buildings are exempt from IHT.
Please also note the “7 year rule” which means that you can make a gift of any value and it will not be subject to IHT provided you survive the gift by more than seven years. Any gifts made less than 7 years before death count towards the IHT threshold.
If you would like any more information about making gifts and IHT planning please do not hesitate to contact our Estates and Trusts team on 01792 650000.