Inheritance Tax and Gifts
If you’re feeling generous, how about saving 40% inheritance tax (IHT)? This article takes a brief look at what IHT exemptions are available in respect of gifts of cash made from your assets.
Everyone can make gifts of up to £3,000 per (tax) year, and not have the gift added to your Estate valuation for IHT purposes when you die. If you did not make a gift in the previous tax year, the exemption for that year can also be used in the current year.
In addition, small gifts of up to £250 per tax year can be made to any one person free of IHT, however if the sum of annual gifts to that person exceeds £250, the whole gift falls back into charge.
Gifts in consideration of marriage or civil partnership
Gifts in consideration of any one marriage or civil partnership by any one transferor, are exempt from the IHT. In this instance, a husband and wife are treated separately. The amounts that can be gifted free of IHT are as follows:
a) £5,000 by a parent of one party of the marriage
b) £2,500 by a grandparent of one party of the marriage
c) £1,000 in any other case
Any excess over and above the amounts listed here may be liable to IHT in the valuation of your Estate, should you die within 7 years of the date of gift. This will depend on your personal circumstances at the date of death.
Normal expenditure out of income
One of the most useful exemptions is that in respect of gifts from ‘normal expenditure out of income’. In summary, the following conditions must be met:
a) The gift was made as part of your normal expenditure,
b) When reviewing one year with another, the gift was made from income (i.e. not from capital savings), and
c) After allowing for all transfers of value forming part of your normal expenditure, you are left with sufficient income to maintain your usual standard of living.
The potential downside to this very generous exemption is that stringent records must be maintained, which HM Revenue & Customs (HMRC) will ask to see when the Estate valuation is eventually submitted upon your death. HMRC guidance currently states that there is no definition of what will, and will not, qualify, and that ‘each case will be judged on its merits’. As a result, if you do wish to make regular payments to an individual/a number of individuals, then it is possible to have these gifts taken out of any IHT charge provided that detailed documentation is kept, of both the amounts gifted, as well as your living costs for each year in question.
It would also be advisable, where possible, to consider splitting the gifts over a number of years, as this will help to establish a pattern of gifts, as opposed to a gift potentially being construed as a ‘one-off’.
But are these exemptions still needed?
Given the effective increase of the IHT nil rate band by virtue of the additional allowance for an individual’s main residence, starting next year, it could be argued that these reliefs are less useful than they once were.
However, it is always possible that future governments may decide to reduce or revoke this main residence relief. It is therefore worth documenting any gifts made now, together with normal living expenditure should you be considering that particular relief, so that the executors of your Estate can make best use of any reliefs when the time comes.
We would always recommend that your IHT position is reviewed regularly, to both take into account any changes in your circumstances, as well as to tax legislation. If you are considering making gifts of significant amounts, we would recommend that you seek appropriate professional advice.