When life changes -
Gifts and inheritance tax
Gifting can form a great part of your overall wealth planning strategy. By having the right plan in place and using the allowances and tax reliefs available, it is one way to maximise the inheritance you leave for your loved ones.
To ensure you are making the most of your tax allowances and exemptions, speak to one of our expert wealth planners today.
What constitutes a gift?
Broadly anything you give away during your lifetime that can be recognised as property, personal items or money is classed a gift. Stocks and shares, jewellery, the family home, cash and investments are common examples. The rule can even extend to items you have sold. For example, if you have sold something far below its market value, for instance a house to a child, the difference between the sale price and market value is classed as a gift.
Anything left in your will does not count as a gift, but forms part of your estate.
What is inheritance tax?
Inheritance tax (IHT) becomes due when someone dies.
The current rate of IHT is 40% (Tax Year 2022/2023). This tax is applied when the value of an estate is above a threshold described as the nil rate band (NRB). The taxable part of any estate above the applicable threshold, after consideration of exemptions and allowances, will be subject to IHT.
If your estate is below the NRB, currently £325,000 (Tax Year 2022/23), or if you leave everything to your spouse or civil partner, or a charity there may be no inheritance tax to pay. It is also possible to transfer any unused percentage of the inheritance tax NRB from a deceased spouse or civil partner to the surviving spouse or civil partner. The survivor’s NRB can never be increased by more than 100%.
The residence nil rate band (RNRB) is an extra NRB, available in addition to the general NRB if certain qualifying conditions are met. It is available on deaths on or after 6 April 2017. For married couples and civil partners, unused RNRB can be transferred if the surviving spouse or civil partner dies after 5 April 2017, irrespective of when the first of the couple died. The RNRB is £175,000 (Tax Year 2022/2023). The RNRB reduces where the value of the estate immediately before death exceeds the £2 million taper threshold.
A reduced IHT rate of 36% is payable on certain assets if you give away 10% or more of the net value of your estate to charity.
Andy and Sam June 2021:
Andy dies and leaves his entire £500,000 estate to his civil partner Sam.
As 100% of Andy’s Nil Rate Band was unused. Sam’s NRB may be increased by 100%. The NRB on Andy’s death was £325,000.
Andy’s estate did not use the RNRB, and it is all available to carry forward. The brought forward allowance will be 100% of the available RNRB when Sam dies. The RNRB on Andy’s death was £175,000.
In January 2022, Sam dies and leaves his entire estate, including a home worth £1,000,000 to his daughter. A claim to transfer Andy’s unused NRB and RNRB can be made.
Some gifts are exempt from inheritance tax:
Allowances and gifts
There are a number of gifts that can be made each tax year which immediately fall outside your estate for IHT purposes, provided they qualify and are made outright.
Gifts of up to £3,000 can be made to individuals each tax year and are immediately treated as being outside of your estate and therefore exempt from any potential IHT liability. Where the previous tax year’s allowance has not been used, this can be carried forward to the current tax year. Although the present tax year’s annual exempt allowance must be fully utilised prior to any which is carried forward. It is important to note that this allowance cannot be used together with the small gift’s exemption.
You can make gifts of up to £250 to as many people as you like in the same tax year, and this would be free from IHT. This exemption cannot be combined with the Annual Exemption. Should the total value of gifts to an individual exceed £250 in the same tax year, then this exemption will no longer apply.
Normal expenditure out of income
You can make regular gifts from any surplus income that you have.
These gifts must form a regular pattern and be part of your normal expenditure, from income (not capital). To qualify and be immediately exempt, any gifts made from regular income must not impact on your standard of living. These may include birthday or Christmas gifts, or regular payments for your child’s rent or financial support for an elderly relative.
Wedding or civil partnership gifts:
£5,000 to a child
£2,500 to a grandchild
£1,000 to anyone else
Wedding and civil partnership gifts may be combined with another allowance, other than the small gift allowance.
A gift made to an individual (or certain types of trusts) which does not qualify as an annual exemption, is considered a potentially exempt transfer (PET).
For a PET to be free of any IHT liability, the donor must survive seven years from the date of the gift. Should death occur within seven years, the gift will have ‘failed’ and the value of this will be included in the donor’s estate together with any other failed gifts that are not exempt or qualify for relief.
Should the combined value of any failed gifts not exceed the NRB of £325,000, then no IHT will be payable. However, more of your estate will be subject to IHT at 40% as a consequence. Should the gift(s) exceed this limit of £325,000, then the excess is liable to IHT at a rate of 40% and the beneficiary who received the original gift is responsible for the payment of any tax owed.
Should the donor’s death occur within three and seven years of making the gift, then taper relief (explained below) can be used to reduce any IHT that is payable on the failed gift, therefore resulting in some tax savings.
|Time between date of gift was made and date of death
|3 to 4 years
|4 to 5 years
|5 to 6 years
|6 to 7 years
The taper relief principle is often misunderstood. So to reiterate, taper relief only applies if the combined value of the gifts exceed £325,000.
We are often asked how to best mitigate for inheritance tax. Good estate planning strategies can enable you to plan to place the right wealth in the right hands at the right times. Any IHT mitigation plan should take into account your views on lifetime gifting, post death legacy and your preferences regarding the use of suitable structures to give you control and flexibility.
If you are looking to make a gift to loved ones, please speak to one of our wealth planners to see how we can help you gift in the most tax efficient way.
Saving for grandchildren
Becoming a grandparent is undoubtedly one of life’s great moments.
Raising financially fit kids
Money can be a tricky concept to explain. Raising children to understand the value of money, the benefits of spending, saving, investing and earning interest, and even borrowing, can seem like a daunting task. However, it’s (almost) never too young to start.