Understanding IHT and gifts
In the UK, having an estate worth a certain value means that your descendants will have to pay inheritance tax. This is paid at a rate of 40% on any estate that is valued above the Nil Rate Band threshold of £325,000. In addition to this, and provided certain conditions are met, an extra allowance is made for the passing on of a main property to children and/or grandchildren.
Inevitably, many people whose estates are eligible for inheritance tax (IHT) seek to reduce the amount that their heirs will have to pay. This can be done in a number of ways, of which one is gifting. Here, we take a look at the types of gifts that are exempt from IHT and the circumstances under which gifts may become taxable.
Tax-free gifts
There are certain types of gift that remain tax free regardless of how long before death they are made. These include those made to a spouse or civil partner, gifts left to UK-established charities, national museums or universities, and gifts made to a child or grandchild upon the occasion of their wedding or civil partnership.
More general allowances are also available for gifts made on an annual basis. A total of up to £3,000 can be made to any recipient, while an unlimited number of gifts worth up to £250 per recipient can also be made each year. A £250 gift cannot, however, be made to the same person who has received a £3,000 gift or portion thereof.
Most other gifts made more than seven years before death are not subject to IHT, as long as they have been made to people, not trusts or businesses.
Potentially Exempt Transfers (PETs)
Those gifts made less than seven years before death are categorised as Potentially Exempt Transfers or PETs. In the case of these, one of two things may happen upon death.
One possible situation is that the PET is reassessed to see if, when combined with other taxable gifts that have been made in the seven years preceding the PET, tax is now due on it. Assets that have been put into trust up to 14 years before death are included in this assessment and could impact the tax liability of the PET. Where tax is due, it is the responsibility of the PET’s recipient to pay.
The second scenario is that the PET is added to the other assets that form your estate and taxed at the usual 40% rate if the total estate exceeds the tax-free threshold. If, for example, the estate, including PETs, is worth £400,000, tax is due on £75,000.
Planning for the future
If you’re looking to plan for the future and wish to make gifts or put assets into trust as part of your considerations, it’s a good idea to discuss your requirements with an Inheritance Tax planning expert. They can provide details on the various opportunities to reduce the potential IHT due on your estate and explain the implications of each approach.