Inheritance Tax: Basic Exemptions and Reliefs
Inheritance Tax (IHT) is levied on lifetime gifts and on the value of your estate on death. Currently, the rates of IHT are 0% on the first £325,000 of value in your estate (known as the "nil-rate band") and 40% on the excess. Given that IHT on death now affects a great many more people than has historically been the case, it is worth considering the basic exemptions and reliefs that are available to minimise IHT liabilities.
Potentially exempt transfers
The principal way in which you can reduce your estate for IHT purposes is to make outright gifts to other individuals (or gifts into certain trusts) during your lifetime. Lifetime gifts of this type and which are not completely exempt under one of the exemptions outlined below will escape IHT if you live for seven years after making the gift. However, even if you do not survive the full seven year period, there can be tax savings if you survive for at least three years after the date of the gift. In addition, the value of a gift for IHT purposes is taken at the date of the gift; which means that any increase in value thereafter will escape a charge to IHT should tax become payable. There is, of course, a fine balance to be struck between ensuring that you retain sufficient funds to maintain your own standard of living and giving assets away before you die. It is also important to note that, to be effective for IHT purposes, you must not retain any benefit in any gifted property.
Normal expenditure out of income
This can be a very valuable exemption which is often overlooked. If you have surplus income which you could afford to give away without affecting your standard of living, you should consider establishing a history or pattern of regular cash gifts (so as to qualify as "normal expenditure"). This might involve, for example, providing funds to pay your grandchildren's school fees or a series of premiums on a life policy. Such gifts are exempt from IHT and can be a very effective way of reducing your chargeable estate.
£3,000 annual exemption
Up to £3,000 can be given free of IHT each tax year (6 April to 5 April) irrespective of the identity of the donee. Any unused portion of this allowance can be carried forward for one year.
Small gifts
Any number of other £250 gifts can be made free of tax to different individuals each tax year.
Gifts in consideration of marriage
Before a marriage, each parent can give £5,000 to the couple, remoter ancestors of the couple can give £2,500 and others can give £1,000 as a wedding present, in each case free of IHT.
Gifts between husband and wife & civil partners
Lifetime gifts and transfers on death between married couples and civil partners (“spouses”) are completely exempt from IHT. The amount is unlimited (save if the recipient spouse is not UK domiciled but the donor spouse is). This exemption can enable spouses to ensure that their assets are held between them in the most beneficial proportions so as to make use of all available tax savings (for example, in relation to Income Tax and Capital Gains Tax) during their lifetimes. On death, the survivor can inherit everything without suffering any tax.
Gifts to UK charity and qualifying political parties
Such gifts are exempt without limit whether made during lifetime or on death.
Heritage Property
Provided certain requirements are met, relief can be awarded in the form of a postponement of IHT, rather than complete exemption, for: articles of pre-eminent quality for their national, scientific, historic or artistic interest; land of outstanding scenic, historic or scientific interest; and buildings of outstanding or architectural interest plus associated amenity land and chattels.
Business Property Relief
This is a very valuable relief conferring either 100% relief (i.e. the equivalent of a complete exemption) or 50% relief on the value of certain "business property" (the definition of which excludes wholly or mainly dealing in securities, stocks or shares, land or buildings or making or holding investments). 100% relief applies to interests in a business, such as a sole trader, a partnership and unquoted shares; 50% relief applies to quoted shares giving you control of a company and property used in your partnership or a company you control. In general you must have owned the business property for two years before the gift/death.
Agricultural property relief
This is similar to business property relief in that certain farming interests can qualify for relief from IHT at either 100% or 50%. Again, there are qualifying periods of ownership which can restrict the availability of the relief; the minimum being two years and in some cases 7 years is required.
*Design and technology by Precedent