Law & Solicitors

The following article draws attention to some of the fundamental exemptions that are available for those seeking inheritance tax reliefs for lifetime gifts.

It is not intended to be an exhaustive list of all the available reliefs, but a guide to those most regularly used in April 2010.

Inheritance tax is a complex area. It is advisable to look at your individual circumstances and make any appropriate changes to your Will to reduce the inheritance tax liability.

1. Annual exemptions

Each year every individual may give away assets/cash to the value of £3000 and this will be ignored for IHT purposes. Any unused allowance can be carried forward for one year only. The amount of this exemption has not increased since 1981. If you give away more than £3000 in any tax year the amount over that threshold will be treated as a potentially exempt transfer.

2. Marriage gifts

Gifts made in consideration of marriage by any individual are exempt from IHT as long as they are within the following limits:

- Parents of bride or groom: £5000

- Grandparents or remote ancestor: £2500

- Bride/groom to the other: £2500

- Other person: £1000

These can be made in addition to making use of the annual exemption.

3. Small gifts to the same person.

You may make gifts of up to 250 to each individual every tax year. This applies to any number of gifts up to 250 per person to separate people. It applies in addition to the annual exemption but cannot be used to cover parts of a larger gift, i.e. it only applies where the total of all gifts in a tax year to an individual does not exceed 250

4. Charities and political parties

Gifts to charities and mainstream political parties are exempt from IHT.

5. Potentially exempt transfers (PETs)

If you make gifts of cash/assets over and above the annual exemption then they will be treated as PETs. PETs are disregarded for IHT if you survive for 7 years from the date of the gift. If you die within 7 years of making the gift and it does not exceed the nil rate bank for IHT at that time, then no tax will be payable on the gift itself but it will reduce the nil rate band available to offset against other assets within your estate.

An advantage of PETs is that they freeze the value of the asset given away – if you die within 7 years of the gift, the valuation of the asset is calculated according to when it was given rather than at the date of death.

If you die within 7 years of making PETs which exceed the nil rate band, then IHT will be payable on the PETs in so far as their value exceeds the nil rate band but taper relief is available provided you have survived for 3 years or more from the date of the gift.

6. Normal expenditure out of income

If you have surplus income, this is a useful exemption; you can give that surplus income away and this will be disregarded for IHT. Any gifts from income must be part of your usual expenditure; there needs to be some regularity/pattern to the gifts or an intention that they will be made regularly. It is important that after making such gifts you are left with sufficient income to maintain your usual standard of living. Careful record keeping is important and a great deal of information has to be provided to HMRC to claim the exemption.

Tax planning is a complex area which is always developing. Always take advice in respect of your own particular circumstances from experienced and specialist tax planning solicitors.