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INHERITANCE TAX EXEMPTIONS
By Karen Kay, Tax Manager at Paish Tooth Ltd.
Inheritance tax exemptions can be a useful way of helping minimise any future inheritance tax liability. Inheritance tax is often seen as tax on already taxed income, but it is in part the notional tax on the untaxed growth of assets such as property and investments on death. In a way you are swapping capital gains tax in life for inheritance tax on death!
Exemptions for lifetime transfers
There are transfers you can make in your lifetime which are exempt from inheritance tax:
1. Annual exemption - £3,000
An individual can gift up to £3,000 each tax year without incurring an IHT charge. The exemption can also be used to exempt part of a larger gift. If an individual gifts more than £3,000 in the tax year then the exemption is used first against the initial gift. For this reason be sure to use the annual exemption before making any potential exempt transfers (PET – see section opposite), otherwise the annual exemption could be swallowed up by an ultimately non-chargeable PET.
Any unused part of the annual exemption may be carried forward for one tax year only. Therefore it is possible to gift £6,000 in one tax year by carrying forward the unused annual exemption from the previous tax year.
2. Small Cash Gifts - £250
An individual can gift another individual up to £250 each tax year without incurring an IHT charge. This exemption cannot be used to reduce a larger gift exceeding £250. But you can make as many gifts of £250 to as many people as you like!
3. Gifts in consideration of marriage/civil partnership
The following individuals can gift the following amounts on the occasion of a wedding/civil ceremony without incurring an IHT charge:
(i) Parent - £5,000
(ii) Grandparent - £2,500
(iii) The couple to each other - £2,500
(iv) In any other case - £1,000
The exemption can also be used to exempt part of a larger gift. The gifts are also per ceremony but if the marriage does not go ahead the exemption does not apply!
4. Gifts out of income
IHT is a tax on gifts of capital therefore gifts out of income are exempt from IHT in the following circumstances:
(i) There is a pattern of giving which is part of the donors’ normal expenditure.
(ii) The gift is made from year to year and from the income not capital.
(iii) The gift leaves the donor with sufficient income to maintain their standard of living.
Potentially exempt transfers (PET)
The exemptions in the previous section are all ignored for IHT purposes, whereas PET’s are only exempt if the transferor survives 7 years from the date of the gift. In this instance the gift can be to any value but must be between individuals or from an individual to a disabled person’s trust or from an individual to a bare trust.
Exemptions for lifetime transfers and transfers on death
1. Husband and wife/civil partners
Gifts between UK domiciled spouses are exempt from IHT whether in life or on death. This exemption ceases on divorce.
2. UK and EU Charities
Gifts are exempt from IHT. This also includes community amateur sports clubs.
3. Gifts for national purpose
This includes gifts to designated bodies such as museums, art galleries, the National Trust and Universities.
Inheritance Tax is a very complex area and Paish Tooth are here to help you best plan how to minimise any potential future inheritance tax liability, whether in life or in death.
Karen Kay is a highly experienced Tax Manager who specialises in personal tax planning, including capital gains tax, inheritance tax, property income and trust and estate administration. She holds ATT tax and FMAAT accountancy qualifications.