Category: Wealth Creation

HM Revenue & Customs allows you to make a number of small gifts each year without creating an Inheritance Tax liability. Remember, each person has their own allowance, so the amount can be doubled if each spouse or registered civil partner uses their allowances. You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PETs), and you could have to pay IHT on their value if you die within seven years of making them.

The estate may not have to pay IHT on assets the deceased gave away as gifts while they were alive.

A gift can be:

• Anything that has a value, for example, money, property, possessions
• A loss in value when something’s transferred, for example, if a parent sells a house to a child for less than it’s worth, the difference in value counts
as a gift

There’s no IHT payable on any gift married couples or registered civil partners give each other – as long as they live in the UK permanently.

Seven-year rule
Taper relief applies where tax, or additional tax, becomes payable on your death in respect of gifts made during your lifetime. The relief works on a sliding scale. The relief is given against the amount of tax you’d have to pay rather than the value of the gift itself. The value of the gift is set when it’s given, not at the time of death.

The original owner must live for seven years after giving the gift. If they don’t, their estate or the person who received it will have to pay IHT on it.

The amount due is reduced on a sliding scale if the gift was given away between three and seven years before
the person died.

For example:

• You’d made a non-exempt gift of £350,000 on 1 February 2011 and died on 20 June 2014
• The IHT nil rate threshold at the date of death was £325,000
• The gift exceeds the threshold by £25,000
• Full rate of tax on the gift: 40% x £25,000 = £10,000
• The gift was made within three to four years of death, so taper relief at 20%
is due
• Taper relief: £10,000 x 20% = £2,000.
Revised tax charge: £10,000 – £2,000
= £8,000

When the person who received the gift pays Inheritance Tax
Anyone who received a gift from the deceased in the seven years before they died may have to pay IHT if the deceased gave away gifts worth more than £325,000 in that time.

HM Revenue and Customs (HMRC) will tell the person that received the gift if they have to pay IHT.

Gifts you don’t pay Inheritance Tax on
The estate doesn’t pay IHT on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called the ‘annual exemption’. Leftover annual exemption can be carried over from each tax year to the next, but the maximum exemption
is £6,000.

Certain gifts don’t count towards the annual exemption and no IHT is due on them, for example, wedding gifts and individual gifts worth up to £250.

Wedding gifts
There’s no IHT on a gift that was a wedding or registered civil partnership gift worth up to:

• £5,000 to a child
• £2,500 to a grandchild or
great-grandchild
• £1,000 to anyone else

The gift must be given on or shortly before the date of the wedding or registered civil partnership ceremony.

Gifts up to £250
There’s no IHT payable on individual
gifts worth up to £250 – unless in the same tax year, the deceased gave the same person:

• More than £250 worth of gifts
• Other gifts that are free from
Inheritance Tax, for example, a wedding
gift or a gift that counts towards their £3,000 annual exemption

Regular gifts from the giver’s income
There’s no IHT payable on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. The gifts include:

• Christmas, birthday and wedding
or registered civil partnership anniversary presents
• Life insurance policy premiums
• Regular payments into a
savings account

Payments to help with living costs
There’s no IHT payable on gifts to help with other people’s living costs. These include payments to:
• An ex-husband, ex-wife or former registered civil partner
• A relative who’s dependent on them because of old age, illness or disability
• A child (including adopted and stepchild) under 18 years old or in full- time education

Charities
There’s no IHT payable on gifts to charities, museums, universities or community amateur sports clubs.

Political parties
There’s no IHT payable on gifts to political parties that have either:

• Two members elected to the House
of Commons
• One member elected to the House of
Commons and received at least 150,000 votes in a general election

Inheritance Tax reliefs allow some assets to be passed on free of IHT or with a reduced bill.

The executor of a Will or administrator 
of an estate should claim the reliefs
when they’re working out how much the estate is worth.

Business Relief
Business Relief allows a business to be passed on as a going concern by reducing the IHT on it by up to 100%.

Agricultural Relief
Agricultural Relief allows a working farm to be passed on as a going concern without paying IHT on it.

Woodland Relief
You don’t include the value of the timber in a woodland when you’re working out the value of an estate but must include the value of the land.

Whoever inherits the woodland may have to pay IHT when they sell the timber – unless it qualifies for Agricultural or Business Relief.

If the woodland also qualifies for Agricultural Relief or Business Relief
(for example, if it’s part of a working farm or business), it won’t qualify for Woodland Relief.

Heritage assets
Some buildings, land and works of art which have historic or scientific interest may be exempt from IHT.

The assets must be made available for the public to view and meet other conditions to qualify as exempt.

Heritage assets can also be transferred to the Crown to pay an IHT bill.

Passing on a home
How much IHT is charged on a home depends on how the person who died owned it and how they passed it on.

Passing on a home as a gift
If a person passed on their home to their children (or someone else) before they died, it’s treated as a gift and the seven-year rule applies.

But if they continued to live in it rent free, their estate has to pay Inheritance Tax on the home even if they lived for seven years after giving it away. This is known as a ‘gift with reservation of benefit’.

Giving away the home and moving out
The original owner can make social visits and stay for short periods in a home they’ve given away without affecting the seven-year rule.

Giving away part of the home to someone who moves in
If a person gave away half their home to their children (or someone else), who moved in and shared the bills, the half given away won’t be included in the valuation of the estate.

Giving away the home and living in it
If the original owner lives in the home after giving it away, they must pay the new owner a ‘market rent’ (the going rate for similar local rental properties).

Selling a home and giving away the money
If someone sold their home and gave the money to their children (or someone else), the money will be treated as a gift and the seven-year rule will apply.

If they bought a new home as a joint owner with one or more others, the home may count as a ‘pre-owned asset’, and there may be Income Tax to pay on it.

Leaving a home in a Will
When a home was wholly owned by the person who died, the value of the whole home is included in the estate for IHT purposes.

When a home was owned by more than one person, only the share owned by the person who died is included in the estate for IHT purposes.

Passing on a home to a husband, wife or registered civil partner
A widow, widower or bereaved registered civil partner automatically inherits the deceased’s share of the house if they owned the home as ‘joint tenants’. There’s no IHT if they continue to live in it.

If they owned the home as ‘tenants in common’, each can pass on their share of the home to anyone else in their Will.

Second homes
If someone gives away a home that isn’t their main home, they may have to pay Capital Gains Tax if the value of it has increased since they first owned it.

Leaving assets to a spouse or registered civil partner
An estate is exempt from IHT if the deceased left everything to their husband, wife or registered civil partner who lives permanently in the UK.

Married couples and registered civil partners can give any value of gifts to each other during their lifetime without IHT being due on them.

This is known as ‘spouse or registered civil partner exemption’.

Transferring Inheritance Tax thresholds
If someone’s estate is less than the IHT threshold of £325,000, the remaining threshold can be transferred to their husband, wife or registered civil
partner’s estate when they die – even if they remarried.

This means the surviving partner’s estate can currently be worth up to £650,000 before any IHT is due.

The transfer is made when the surviving husband, wife or registered civil partner dies, and is done by the executor of their Will or administrator of their estate when they work out how much it’s worth.

Exceptions

The rules for transferring a threshold are different if:

• The estate of the first spouse or
registered civil partner qualified for  relief on woodland or heritage assets
• The surviving spouse or registered civil partner had an unsecured pension as the ‘relevant dependant’ of a
person who died with an Alternatively Secured Pension
• The first spouse or registered civil partner died before 1975

Keeping records
The executor or administrator of the estate should give the surviving husband, wife or registered civil partner documents that show any unused IHT threshold.
These will be needed to transfer the threshold to the surviving partner’s estate when they die.