Exemptions From Inheritance Tax - A Simple Guide
This article highlights some key reliefs and exemptions for inheritance tax legislation with regard to lifetime gifts.
It is not intended to be an exhaustive list of all the available reliefs, but a guide to those most regularly used in April 2010.
Inheritance tax is a complex area. Always take advice on your own particular circumstances and consider reviewing your Will at the same time as making plans to reduce your liability to inheritance tax.
1. Annual exemptions
Each year every individual may give away assets/cash to the value of 3000 and this will be ignored for IHT purposes. Any unused allowance can be carried forward for one year only. The amount of this exemption has not increased since 1981. If you give away more than 3000 in any tax year the amount over that threshold will be treated as a potentially exempt transfer.
2. Marriage gifts
Gifts made in consideration of marriage by any individual are exempt from IHT as long as they are within the following limits:
- Parents of bride or groom: 5000
- Grandparents or remote ancestor: 2500
- Bride/groom to the other: 2500
- Other person: 1000
These can be made in addition to making use of the annual exemption.
3. Small gifts to the same person.
You may make gifts of up to 250 to each individual every tax year. This applies to any number of gifts up to 250 per person to separate people. It applies in addition to the annual exemption but cannot be used to cover parts of a larger gift, i.e. it only applies where the total of all gifts in a tax year to an individual does not exceed 250
4. Charities and political parties
Gifts to charities and mainstream political parties are exempt from IHT.
5. Potentially exempt transfers (PETs)
If you make gifts of cash/assets over and above the annual exemption then they will be treated as PETs. PETs are disregarded for IHT if you survive for 7 years from the date of the gift. If you make a gift under the nil rate band within 7 years prior to your death, no inheritance tax is payable, however the overall nil rate band available to the remaining estate will be reduced accordingly.
An advantage of PETs is that they freeze the value of the asset given away - if you die within 7 years the value off the asset for IHT purposes is its value as at the date of the gift, not at the date of your death.
If you make a Potentially Exempt Transfer (PET) exceeding the nil rate band and die within 7 years of doing so, the PET becomes liable for inheritance tax, although there is taper relief available on the condition that you have survived for 3 years or more since making the PET.
6. Normal expenditure out of income
If you have surplus income, this is a useful exemption; you can give that surplus income away and this will be disregarded for IHT. Any gifts from income must be part of your usual expenditure; there must be a regular intention and process for making the transfers. It is important that after making such gifts you are left with sufficient income to maintain your usual standard of living. Careful record keeping is important and a great deal of information has to be provided to HMRC to claim the exemption.
Tax planning is a complex area which is always developing. It is sensible to always seek advice from specialist tax planning solicitors in order to tailor a will to your own personal circumstances.
by: Tim Bishop
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