|
Exempt Beneficiaries
Transfers of assets to certain beneficiaries are exempt from
Inheritance Tax. They include:-
- UK domiciled1 husband and wife
- UK domiciled1 civil partner
- certain national institutions e.g. The
National Trust, national museums and universities
- UK registered charities
- UK political parties
1 HMRC website explains domicile as having "no precise or
agreed definition. Broadly speaking, under English law you are
domiciled in the country in which you have made your permanent
home". See the
HMRC website.
Exempt Gifts
Some gifts are exempt because of the type of gift. Gifts
made in consideration of marriage or civil partnership are
exempt up to the following amounts:-
- £5,000 for a gift from a parent
- £2,500 for a gift from a grandparent
- £1,000 for a gift from any one else
Small Gifts
Small Gifts are exempt up to the value of £250, and you can
give it to as many people as your want. This exemption can not
be used in conjunction with any other exemption
Annual Exemption
Each tax year you are allowed to gift away up to £3,000. Any
part of this which is unused from a previous tax year can be
carried forward to the next one. So you can give away £6,000 if
you have not used the previous year's £3,000 allowance.
Gifts from
normal expenditure
Gifts
that you make out of
your income after tax
are also exempt provided
you can maintain your
previous standard of
living from the balance
of your net income, (i.e.
where it is not a gift
from your capital).
Regular payments coming
from single premium life
bonds associated with
either a Discounted Gift
Trust or Loan Trust are
not eligible for
exemption under normal
expenditure rules. It
would need to be part of
your regular
expenditure, and would
include:-
-
regular or
monthly
payments
such as
University
or School
fees for a
child in
full time
education
-
the regular
premiums for
a life
insurance
policy
Potentially Exempt Transfers (PETS)
Most gifts which are not exempt are usually Potentially
Exempt Transfers (PETs) if made to an individual or certain
types of trust. For the PET to become
totally free of Inheritance Tax you would need to live for
seven years after the date of the gift, and not retain any interest in the gift
(i.e. you can not gift your house but continue to live in it, as
this would be a Gift With Reservations).
The Inheritance Tax liability on a PET reduces on a sliding scale, this is called
Taper Relief. The details are below:
|
Years between gift
and death |
Reduction in
tax charged |
|
0-3 |
0 |
|
3-4 |
20% |
|
4-5 |
40% |
|
5-6 |
60% |
|
6-7 |
80% |
|
7+ |
100% |
Please note that this reduction only
applies to the tax payable on the failed PET. The full value of any gift made within
seven years of death would be added to the value of the estate,
and the Nil Rate Band would be applied to the gift.
e.g.
Mr Smith, a widower gifted to his son
£425,000 (after using his annual allowance), 5½ years ago before he
died. The assets of Mr Smith (deceased) on his death, were his
house valued at £200,000 and £300,000 in other assets.
|
Amount |
|
Item |
|
£425,000 |
|
Gift to son
|
|
£200,000 |
|
House |
|
£300,000 |
+ |
Other Assets |
|
£925,000 |
|
Total |
| |
|
|
|
£900,000 |
|
|
|
£325,000 |
- |
Nil Rate Band (NRB) |
|
£600,000 |
|
Amount Subject to
IHT |
| |
|
|
The nil rate band of £325,000 is
applied to the gift. This means that £100,000 of the gift is
liable to Inheritance Tax, but qualifies for Taper Relief.
The remaining £500,000 is liable to Inheritance Tax at a rate of
40%.
|
Amount |
|
Item |
|
£425,000 |
|
Gift to son
|
|
£325,000 |
- |
Nil Rate Band |
|
£100,000 |
|
Total of gift
liable to IHT |
| |
|
|
|
£100,000 |
|
Amount of gift
greater than NRB |
|
40% |
x |
Tax Rate for IHT |
|
£40,000 |
|
|
| |
|
|
|
£40,000 |
|
|
|
60% |
x |
Discount on tax due
1 |
|
£24,000 |
|
Discount amount |
| |
|
|
| |
|
|
|
£40,000 |
|
|
|
£24,000 |
- |
Discount |
|
£16,000 |
|
Amount of Tax due
on
the Gift of £425,000 |
| |
1.The
gift was made 5½ years before death, therefore
the discount is 60% of the tax due |
The remaining £500,000 is liable
to Inheritance Tax at a rate of 40%, which amounts to £200,000.
(This assumes Mr Smith had no transferable nil rate band
available).
If you plan to gift assets then
it is important to get the right advice. Even gifting an asset
does not mean that it will escape Inheritance Tax. There are
steps you can take to cover yourself and your family. Using
trusts can help, or you can even get
life cover policies
specifically designed to protect the liability of a PET. We're
here to help, so please contact us if you want to discuss the
options available to you.
|
