Inheritance Tax Planning – Lifetime gifting
When it comes to lifetime gifting there are many ways in which you can provide for your family or causes close to your heart with no inheritance tax (IHT) implications. Our expert team of private client solicitors at The Burnside Partnership are here to provide you with comprehensive advice in your legal matters. We are lawyers based in London, Marlow and Oxford, so how can we help? Read on to discover the various elements of lifetime gifting and how we can support you.
What counts as a gift
Gifts can include gifts of money, household and personal items, property and shares.
Gifts can also include sales at an undervalue. For example, if you sold your property worth £300,000 to your son for £200,000, then the £100,000 difference counts as a gift
Who does not pay inheritance tax
Gifts to certain people or organisations are exempt from IHT including.
- A spouse or civil partner
There is no IHT to pay on gifts between spouses or civil partners. So, you can gift your spouse or civil partner as much as you like provided you are both UK domiciled.
- A charity
Outright gifts to UK charities or Community Amateur Sports Clubs are exempt from IHT.
- Political parties
Gifts to political parties are also exempt from IHT provided that the party is of sufficient stature.
Exemptions on lifetime gifts
If none of the above exemptions apply, there are the following additional exemptions listed below. The exemptions are applied in the order they are listed, with “normal expenditure out of income” applied first and the “annual exemption” applied last.
Normal expenditure out of income
You can make regular gifts to an individual and there is no limit on how much you can give free of IHT, provided:
- The gift was part of your normal expenditure; and
- The gift was made out of your after-tax income; and
- You are left with sufficient income to maintain your usual standard of living.
A regular pattern of giving is required, such as paying the school terms fees for a grandchild.
This can be a very useful exemption, if you have surplus income, to reduce your estate over time without an IHT charge.
Small gifts
You can make as many gifts of up to £250 per a recipient in any tax year as you want. You cannot combine the small gifts exemption with any other allowance to the same person.
Weddings and civil partnership gifts
Wedding/civil partnership ceremony gifts are exempt up to certain limits. The amount you can give depends on your relationship to the couple. Each parent can give £5,000, each grandparent or great-grandparent £2,500 and any other person £1,000.
Annual exemption
The annual exemption applies to lifetime gifts that are not exempt under any of the other provisions.
Each tax year (so from 6 April to 5 April the following year) you can gift £3,000 free of IHT and if you have not used the previous year’s amount, you can use that too. You can give gifts of up to £3,000 to one individual or split the £3,000 between several individuals.
If the gifts in a tax year exceed the £3,000 annual exemption, then the exemption applies to gifts in date order.
Potentially exempt transfers
If there are no exemptions available, an outright gift to an individual (called “a potentially exempt transfer”) might still fall out of charge. If you survive for 7 years from the date of the gift, then it becomes exempt from IHT.
If you do not survive for 7 years, then the gift will use up all or part of your nil rate band, currently £325,000. However, after 3 years there would be some tapering to reduce the amount of IHT to pay. The amount of taper relief is on a sliding scale from 20% to 80% of the full rate of tax and depends on the number of years between the gift and death.
Taper relief only applies if the total value of gifts made in the 7 years before your death is over £325,000.
Reliefs
If the gift is of a special type of asset, then business property relief or agricultural property relief may apply.
Importance of keeping records
You should keep careful records of gifts made, including the date of the gift, the amount of the gift, the nature of the gift and the recipient.
For more information, please contact Alison Craggs.
This article was also published on www.lifetimelawyers.org.uk.