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Inheritance Tax Gifts

In the article below we explore the effect that making of lifetime gifts can have on reducing an estates exposure to Inheritance Tax (IHT) liability on death.   Commonly referred to as “Inheritance Tax Gifts” it is one of the simplest ways to avoid inheritance tax.

Gifts Exempt from Inheritance Tax

The following gifts can be made without either a lifetime or death IHT charge:-

  • £3,000 annual exemption
  • £1,000 to £5,000 wedding
  • up to £250 per person
  • Regular out of income
  • Payments to help with living costs
  • to charities
  • to political parties
  • to spouses or civil partners as long as both are UK resident

Married couples and civil partners can gift each other assets without any IHT or capital gains tax provided the recipient is domiciled in the UK. If the recipient is non-domiciled the amount that can be gifted tax free is restricted.

Potentially Chargeable Transfers

Lifetime gifts not covered by the above exemptions are treated as either potentially chargeable transfers (PETs) or chargeable lifetime transfers (CLT’s). By way of example, gifts to family members other than a spouse will be potentially exempt and will be completely exempt if the donor survives seven years following the gift. A lifetime gift to a discretionary trust or a company will be immediately chargeable to IHT at 20% if the gift exceeds the tax threshold and also in other circumstances.

The gifts can be included in the estate of the donor if they were made less than 7 years before the date of death.

If the person making the gift gave away more than £325,000 in gifts in the last 7 years of their life, and this includes the gift to you, you may be required to pay any IHT directly attributable to the gift. Otherwise, IHT is paid by the estate. Whether you are to pay the tax will depend upon the conditions of the Will of the donor.

IHT is payable at the following rates on PETs made between the date of the inheritance tax gifts and date of death:

  • Less than 3 years – 40%
  • 3 to 4 years – 32%
  • 4 to 5 years – 24%
  • 5 to 6 years – 16%
  • 6 to 7 years – 8%

These rates may be reduced if the deceased qualified for a reduced rate of IHT.

Inheritance Tax Gifts that are not subject to Inheritance Tax

There is an annual exemption of up to £3,000 of gifts made each year. The £3,000 exemption from the previous year may also be available, if not used in that year.

The following allowances are generally in addition to this.

Wedding Gifts

There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:

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

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

Gifts up to £250

There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.  You can’t give someone another £250 if you’ve given them a gift using a different exemption, e.g. the £3,000 annual exemption.  If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.

Regular gifts from the giver’s income

There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. These gifts include:

  • Christmas, birthday and anniversary presents
  • life insurance policy premiums
  • regular payments into a savings account

Payments to help with living costs

There’s no Inheritance Tax on gifts to help with other people’s living costs if they’re made to, for example:

  • an ex-husband, ex-wife or former civil partner
  • a relative who’s dependent on them because of old age, illness or disability
  • a child (including adopted and step-child) under 18 or in full-time education

Charities

There’s no Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.

Political Parties

There’s no Inheritance Tax on gifts to political parties that have either:

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

Understanding Inheritance Tax Gifts

If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090.  Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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Making the most of Tax Free Inheritance Tax Relief

There are numerous ways to reduce your your exposure to tax liabilities and making sure you take advantage of Inheritance Tax Relief with the proper planning will help you minimise the amount of money from your estate that goes to the government.  Bourne Accountancy are experts in estate planning and can advise if any of the following reliefs could be applicable to your situation.

Business Property Relief (BPR) – Any ownership of a business, or share of a business will be included in your estate for Inheritance Tax purposes. However, you can get Inheritance Tax Relief of either 50% or 100% on some of an estate’s business assets such as business property, buildings and machinery. Ownership can be passed on as part of the will or while the owner is still alive subject to further rules.

Agricultural Property Relief (APR) – The government has been especially generous to farmers which is understandable given their strategic importance to the UK. The rules are that you can pass on some agricultural property free of Inheritance Tax, either during your lifetime or as part of your will. Agricultural property that qualifies for Agricultural Relief includes land or pasture that is used to grow crops or to rear animals intensively. It also includes farm buildings, farm cottages, farmhouses and stud farms, there are a few exceptions however such as farm equipment and machinery, derelict buildings, harvested crops and livestock and the rules state the property must have been in ownership for two years before.

AIM Listed Shares – The Alternative Investment Market (AIM) is a sub market of the London Stock Exchange designed to let smaller companies float shares. To encourage investment in these smaller companies the government provides a 100% Inheritance Tax Relief provided the shares have been held for a minimum of two years.

Unlisted Shares – Similar to AIM Shares there is a 100% exemption on shares held in a private company, again the shares have to be held for two years prior to death.  This can be a very useful relief for elderly and wealthy taxpayers who can still receive an income from the business without having to be concerned about the future IHT burden.

Listed Company Shares – If you have a controlling interest in a listed company then a 50% IHT relief is available.
Personal Assets – Certain personal assets which are used in a relation to business activities attract a 50% IHT relief.

Additionally, there are other, smaller inheritance tax reliefs that can be claimed:

  • An annual exemption of £3,000, Any unused allowance can be carried forward for one year.
  • Small gifts exemption of £250 per person.
  • Gifts on a marriage or civil partnership: £5,000 from a parent, £2,500 from a grandparent, £1,000 others

There is also an exemption for annual gifts made from income. Basically, a gift will not count as a gift for IHT purposes, if you can demonstrate that the donor’s annual income is at a level to make the gifts without affecting their ability to cover their usual monthly costs.

Gifts to an individual within the nil rate tax band, and with no strings attached, may still be made without any charge to IHT if the donor lives for 7 years after making the gift.

Bourne Accountancy are experts in Inheritance Tax planning and if you haven’t evaluated your estate for IHT purposes recently we strongly recommend a review. All you need to do is compile a list of your assets, let us have sight of your Will(s) and we can consider changes you might make to reduce your exposure to this tax.

Inheritance Tax Relief Information

To find out more about Bourne Accountancy please visit our main website: http://www.bourneaccountancy.co.uk or call us directly on 01293 399520.
To read more on the subject of Inheritance Tax please visit: http://inheritance-tax.bourneaccountancy.co.uk