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Using Simple IHT Allowances and Gifts

Depending on how you feel about inheritance tax you can take some simply actions to reduce your liability to inheritance tax.

Gift to spouses or civil partners are exempt from IHT if you are a permanent resident in the UK. They are also free from capital gains tax and therefore passing assets from one partner to another may also be a good idea for reducing income tax during your life time.

Other exemptions that could be considered include gifts to:

  • a qualifying charity
  • Museums, universities and the national trust
  • and UK political parties

One of the easiest ways to reduce your inheritance tax bill is by making sure that you use the annual exemption. You can gift £3,000 every tax year without attracting IHT or having to wait for 7 years before it has left your estate. Both partners are able to do this each year. If you have forgotten, or did not have the money, in the previous tax year you can give away double the amount. You can't go back more than one year for unused allowances.

 

Wedding and civil partnership ceremonies trigger additional IHT gift exemptions that should be considered, Parents of the happy couple can each gift £5,000 and Grandparents £2,500 each. Care should be taken as the gift must be made close to the time of the wedding and in the event of the wedding being cancelled the exemption to IHT will not apply.

Small gifts of up to £250 can be made to as many individuals as you wish, however gifts over £250 have no exception at all.

Regular gifts and payments that form part of your normal expenditure can be exempt from inheritance tax. However these gifts must be paid from income after you have paid income tax and may not be made from capital. If the gifts are deemed to reduce your standard of life they may lose their exemption. The gifts must be regular, but not necessarily monthly. They could be the same amount each Christmas or birthday for example and could include the premiums for a life insurance.

     

Potentially Exempt Transfers or PETs

Absolute gifts that you make during your life time are exempt from inheritance tax provided you live for at least seven years after making the gift. These gifts are known as Potentially Exempt Transfers or PETs. The word absolute is very important because if you retain any benefit from the asset that you have gifted it will not be considered a Potentially Exempt Transfer and therefore still part of your estate. A common error that occurs is where a property has been transferred to another family member, but the donor [the giver] lives in the property rent free.

So what happens if you die before seven years are up?

In the event of your death before seven years have passed since making a gift and the total value of your estate including the gifts is over the inheritance tax threshold for the year that you die; then the inheritance tax will be taken from the estate and not the beneficiary of the gift.

 

If the gift is over the value of the inheritance tax threshold then the inheritance tax can be paid by either the beneficiary of the gift or by the people representing the estate.

Taper Relief is applied to the gift after three years reducing the value of the gift that would be considered as part of the estate to 80%. The value of the gift is reduced by 20% after each full year until it is totally out of the estate after year seven.


Value of Gift Time Since Gift Taper Relief Value Added to the Estate
£200,000 0-1 years 0% £200,000
£200,000 1-2 years 0% £200,000
£200,000 2-3 years 0% £200,000
£200,000 3-4 years 20% £160,000
£200,000 4-5 years 40% £120,000
£200,000 5-6 years 60% £ 80,000
£200,000 6-7 years 80% £ 40,000
£200,000 After 7 years 100% £ Zero

Setting Up Trusts with a Gift

Two common ways to set up a trust are either through loaning the trust money; this is known as a loan trust.

Because you are only lending the trust your capital to make some money, you are not actually giving your assets away and therefore not reducing the value of your estate. The benefit of this is that the money the trust makes will be outside your estate thereby reducing or even stopping the rate your estate is growing.

Another way of setting up a trust is to give capital or an asset to a trust. Now you are actually reducing your estate. Gifting money to a trust is not generally exempt from inheritance tax.

 

Keep track of your gifts

Sorting out our own financial affairs can be bad enough. Dealing with someone else's when they are no longer around to ask a question is even worse. We would advise anyone making gifts whether they are large single gift or lots of small regular payments, to keep an accurate record of the gift and the exemption that you have used for your executor. It may also be useful to keep your tax returns available so that your representative is able to prove that the regular gifts come from income and did not affect your life style.

 

 


 
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