The rules on Inheritance tax are complex, but there are a whole set of circumstances in which you can maximize what you can give before tax is payable.
What is Inheritance Tax?
Inheritance tax (IHT), charged at 40%, is the tax that is payable on a person’s net estate when it exceeds a certain threshold – currently £325,000 (2014/2015 tax year). However, since October 2007, you can transfer any unused IHT threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the threshold of the second partner – from £325,000 to as much as £650,000, depending on the circumstances.
In certain circumstances IHT is payable on assets that a person has given away in their lifetime.
Exemptions and Reliefs
There are a number of exemptions and reliefs available which will allow a person to pass on certain amounts, either during their lifetime or on death, without any IHT liability being incurred:
1. Spousal exemption – any property passing to your spouse or civil partner will be exempt from IHT even if the amount is above the nil rate band. This exemption applies even if you are legally separated but does not apply if you are divorced or you are UK
domiciled but your spouse is not. However, gifts to an unmarried partner, such as a co-habitee, will not benefit from this exemption.
2. Charity exemption – gifts to charity are exempt.
3. Other exempt beneficiaries – gifts to national institutions, such as museums, universities and the National Trust as well as UK political parties are exempt.
4. Potentially Exempt Transfers (PET) – if a gift is made more than seven years before the date of death then such a gift will be exempt. There are special rules relating to gifts made into trusts and to companies.
5. Annual exemption – you can give away £3,000 in each tax year in what is known as your annual exemption. Any part of your annual exemption that was not used in the previous year can be carried forward to the next year but no further (giving a maximum of £6,000).
6. Small gifts exemption – gifts not exceeding £250 in any one year are exempt. However they cannot be combined with any other exemption such as your annual exemption.
This is a useful method for grandparents to give away money to their grandchildren.
7. Wedding/civil partnership exemption – gifts for a wedding or civil partnership (up to certain amounts) will be exempt.
8. Normal expenditure out of income – gifts that are part of your normal expenditure, are made out of income (not your capital) and which leave you with sufficient income to maintain your usual standard of living are exempt. For example life insurance premiums or recurring gifts for Christmas, birthdays or anniversaries. This is another method by which grandparents could benefit their grandchildren.
9. Maintenance gifts – maintenance payments are exempt.
10. Agricultural Property Relief (“APR”) – reliefs are available when transferring ownership of an agricultural property. Relief is generally at 100% although in certain circumstances is limited to 50%.
11. Business Property Relief (“BPR”) – similar to APR, but for general business assets and property subject to a number of qualifying rules and circumstances.
There are of course some detailed qualifying rules around APR and BPR, so obtaining legal advice is essential. If you have any queries then please do contact Matthew Cross, a solicitor focusing on inheritance tax on 01872 265100 or email email@example.com.