With the shops being closed during lockdown 2, those who are not a fan of online shopping may be considering financial gifts this festive season, but could there be any Inheritance Tax (IHT) consequences?
Inheritance Tax is levied on certain gifts made during an individual’s lifetime as well as on a person’s estate when they die. However, most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and the result can be a substantial tax saving.
There are some exemptions from Inheritance Tax as follows:
- £3,000 per annum may be given by an individual without an IHT charge. An unused annual exemption may be carried forward to the next year.
- Gifts between husband and wife are generally exempt if both are UK domiciled.
- Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. This exemption cannot be used to cover part of a larger gift.
- Gifts that are made out of income which is typical and habitual and does not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
- Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
- Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
If an individual dies within seven years of making a chargeable gift, IHT is currently levied at a rate of nil up to a threshold and at 40% for any value that exceeds that limit. Also, any unused IHT nil rate band from the first spouse to pass away is transferred to the surviving spouse. The current IHT nil rate band is £325,000. This nil rate band can be extended further (currently by another £175,000) to the extent the value relates to a qualifying residence, but there are complex conditions.
There are also special reliefs for business property and agricultural property. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band, and PETs.
It is also possible that if an individual makes a lifetime gift (or sale at under-value to a connected person) this may not be effective, even after seven years have expired if they continue to benefit from the asset. This is referred to as a ‘gift with reservation’ and might apply for instance if a person’s house is transferred to a relative but continues to be occupied by the donor.