Inheritance tax and tax-free gifts

When administering an estate there are many duties a Personal Representative of an estate has and one of those would be to confirm how many gifts the deceased made during their lifetime. It is important to keep records of such information so that the Personal Representative can complete the forms required for HM Revenue & Customs accurately when applying for the Grant of Probate.

Most gifts that you make to others during your lifetime (unless they are Tax-free gifts e.g charitable gifts) are classified as ‘potentially exempt transfers known, as “PETS” and if you survive for seven years after making the gift no Inheritance Tax (“IHT”) is due. IHT is charged at two rates on death. The first £325,000 of an estate (referred to as the “nil rate band”) passes free of IHT, while the balance of your estate is taxed at 40%.

There are certain useful exemptions and reliefs which are available on death. Any transfer to a spouse (assuming they are UK domiciled) are wholly exempt from IHT.

All gifts to charities, political parties, certain national bodies and bodies providing a public benefit, such as museums and art gallerie benefit from being exempt from IHT.

During your lifetime you have an annual exemption allowing you to gift up to £3,000 in any tax year and this amount is exempt from IHT. If the annual exemption is not used in a particular year the unused part may be carried forward for one year but no longer. In addition to this annual exemption life time gifts of up to £250 per person are also exempt.

If you discover that you have surplus income then you may give this away and then such gifts of income will be free of IHT. Special rules apply to such gifts of income and if you want to utilise this exemption then you should please contact me to get further information.

You can give up to £5,000 free of IHT to children if they are getting married and up to £2,500 to any grandchild. You are also able to give £1,000 to others free of tax if they are getting married.

You are obviously able to give as much as you wish away but in order for these gifts to be free of IHT (subject to the annual exemption of £3,000) you would need to survive 7 years.

There are some generous reliefs too. Shares in private trading companies, trading partnerships and assets used by partnerships or companies can qualify for relief from IHT at either 100% or 50% in certain circumstances, provided they have been owned for 2 years. Agricultural property can also qualify for relief, again at either 100% or 50% but this is only available on the agricultural value of the property and not its potential value for other purposes. The relief depends on the ownership and occupation of the land and is usually available after a 2 or 7 year period. The rules for these reliefs can be complex and I would be happy to provide you with further information if you would like.

If you would like to discuss any issue raised in this article please do not hesitate to contact Lorna Denton-Cardew on 01473 343921