2019/20 Inheritance Tax (IHT) accounted for less than 1% of total Government revenue. This is due to some generous IHT reliefs, which can prove very valuable with careful planning.
Since the COVID-19 pandemic has significantly increased Government spending on support schemes, the Government is under pressure to find additional funding in order to pay for it. It is therefore likely that the IHT rate could be increased or reliefs cut back.
In other blogs, we have discussed Business Property Relief and Agricultural Property Relief, two very worthwhile reliefs which protect many farms from IHT. Many farming businesses and estates are still exposed to IHT due to diversification or the structure of the business and therefore need to rely on other IHT exemptions, notably relating to gifts.
What are the Inheritance Tax exemptions?
Lifetime gifts are generally subject to IHT if they exceed the £325,000 nil rate band and do not qualify for either Agricultural Property Relief or Business Property Relief.
However, some gifts are automatically exempt from IHT and do not require you to survive seven years for the value of the gift to fall outside your estate. An important thing to remember when you gift an asset is that you are no longer able to benefit from any income it produces. We have put together a list of gifts that are exempt from Inheritance Tax below.
Gifts to your spouse or civil partner
Gifts between married couples are normally exempt from IHT. Leaving everything in your Will to your spouse means that your estate may not incur an Inheritance Tax liability. All assets inherited by the surviving spouse will pass at market value, washing away any capital gain. If the surviving spouse then subsequently gifts the assets and survives seven years, there is no Capital Gains Tax or Inheritance Tax charged.
Gifts to organisations
Gifts to charities, political parties, housing associations or national heritage bodies such as museums are completely exempt from IHT. There are no limits on how much you can gift to these organisations. All these exemptions apply to transfers both during lifetime and on death.
Small gift exemption
Lifetime gifts of up to £250 to any person in a tax year are completely exempt. This is, however, an all-or-nothing exemption and this is the maximum that can be given. For example, if you make a birthday gift of £275 to a grandchild, none of the gifts would be exempt from IHT.
There are no limits on the number of small gifts you can make. Therefore if a grandparent has 15 grandchildren they could give each of them a gift of up to £250.
Gifts for marriage are also exempt from tax up to certain limits depending on your relationship with the bride and groom. A mother or father can gift up to £5,000 to a son or daughter as a wedding gift and the whole amount is exempt. Grandparents and great-grandparents can gift £2,500, the bride and groom £2,500, and any other person £1,000.
These exemptions apply per marriage. So if a mother gives £5,000 to her daughter she cannot gift £1,000 to her son-in-law. These are not all-or-nothing exemptions, so only the excess amount will be deemed a transfer for IHT.
Gifts out of excess income
Gifts out of “normal expenditure out of income” are exempt from IHT. “Normal” in this case means habitual or typical, e.g. a gift that happens year after year. The gift will be treated as having to be made out of excess income if you are left with sufficient income to maintain your normal standard of living.
There is no monetary limit on this exemption because different individuals have different levels of income and what is classified as normal expenditure varies from person to person. 6) Annual exemption Every person can gift £3,000 per tax year without incurring an IHT charge. Any unused amount can be carried forward for one tax year only.
It is important to understand which gift reliefs you are using. You should keep detailed records, so your executors can make the necessary claims when you are no longer around to ask.
We can help you maximise your Inheritance Tax exemptions
If you would like to discuss any of the above or ways to minimise potential Inheritance Tax charges, please do get in touch. Contact us by emailing firstname.lastname@example.org or 01536 646000 or contact us here and we will get back to you.
Find out more about our services to the agricultural and rural farming community here.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.