PLANNING FOR THE FUTURE INHERITANCE TAX & LIFETIME GIFTS

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1 PLANNING FOR THE FUTURE INHERITANCE TAX & LIFETIME GIFTS BACKGROUND INFORMATION 1. Inheritance tax is charged on your estate after you have died. Your estate comprises the value of your home, any other property, shares and investments and cash and your personal belongings, for example, jewellery, motor car, book or stamp collections. 2. If your estate is worth more than the Inheritance Tax threshold (known as the nil rate band) Inheritance Tax (IHT) is charged at the balance over the threshold. The threshold is 325, which is frozen until April The rate of IHT is 40% on the balance over the threshold. For example, David s estate is 600,000.00; the threshold of 325,000 is deducted leaving a balance of 275,000.00, which is charged to 40%, which yields 110, IHT. LIFETIME GIFTS 1. The IHT charged may be affected by the incidence of lifetime gifts. 2. Exempt donees- You are able to make gifts to certain people and organisations without having to pay any IHT. The gifts are exempt if you make them during your lifetime or in your Will. The exempt gifts are made to: Your lawful husband, wife or civil partner provided he or she has a permanent home in the UK. A qualifying charity established in the EU, including a church. Some National Institutions, e.g. Museums, Universities and the National Trust. 1

2 Any UK Political Party that has at least two Members elected to the House of Commons or has one elected Member but the Party received at least 150, votes. 3. Any gifts to your unmarried partner or unregistered civil partner are not exempt. 4. Annual exemption- You are able to make gifts worth up to 3, in total in each tax year which are exempt from IHT upon death. The tax year runs from 6 th April to 5 th April the following year. You are able to carry forward any unused part of the 3, exemption to the following year, but if it not used in that year, the carried-over exemption expires. 5. Exempt gifts- These are made in addition to the 3, exempt gift. (a) Wedding gifts/civil partnership ceremony gifts: Parents may give cash or gifts worth up to 5, Grandparents and great-grandparents can each give cash or gifts worth 2, Any other person may make cash or gifts worth up to 1, You must make the gift (or promise to make it) on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift or if you make the gift after the ceremony without having promised first, the exemption will not apply. 2

3 (b) Small gifts- You are able to make small gifts up to the value of to an unlimited number of individuals in any one-tax year if you give an amount greater than , the exemption is lost all together. (c) Regular gifts or payments that are part of your normal expenditure- This is a useful exemption which must be claimed by your executors upon death. It is essential for you to keep proper records of the gifts to enable your executors to claim successfully that the exemption applies. The gifts must comprise normal expenditure out of net income (i.e. the tax has been paid) and the gifts will only qualify if you have enough income left to maintain your normal lifestyle. There must be a settled intention to make regular gifts for example, you should write a letter to make the commitment or establish a pattern e.g. the payment of annual premiums on a life policy for the benefit of someone else or written in trust for the beneficiary. You are able to stop making the gifts if your circumstances change, for example, if you need more income to pay for care. The exemption is established as soon as the payments are made and this means that if you stop making the gifts you do not lose the exempt status of those you have already made. Income will include salary, rent received, dividend income from shares, and interest paid on a bank or building society account. Note that it is net income after tax has been paid. The gifts are made by an individual and not pooled as a couple. 3

4 The exemption may be combined with other exemptions. The executors would need to claim the exemption by completing form IHT403. It is useful to obtain this form (link: and to provide the details of the gifts on an ongoing basis. This will enable your executors to claim it after you have died. If you do not keep proper records, your executors will not be able to establish this exemption. 6. Maintenance payments- Exempt maintenance payments may be made to: Your ex-husband, ex-wife or former civil partner. Relatives who are dependant on you because of old age or infirmity. Your children, including adopted children and stepchildren, who are under 18 or in fulltime education. Note that fulltime education may continue to an age well beyond The seven-year rule- potentially exempt transfers - Many people seem to be aware of a seven-year rule but do not have any details regarding the nature of this rule, there are many widespread misunderstandings regarding this rule. You are able to make gifts to individuals, which will be exempt from IHT provided that you outlive the gift for seven years and this type of gift is known as a Potentially Exempt Transfer (PET). If you die within seven years and the total of the gifts you have made is less than the IHT threshold ( 325,000.00), the value of the gift is added to the estate and any IHT due is paid out of the estate. If you die within seven years of making the gift and the gift is more than the IHT threshold ( 325,000.00), IHT is paid on the value of the gift, either by the donee or by the personal representative of the estate. 4

5 If you die between three and seven years after making the gift and the total value of the gift paid is over the IHT threshold, taper relief will apply to reduce the impact of the gift. The following shows how taper relief may work: Time made between the date of the gift to the date of death Taper relief percentage applied 3 to 4 years 20% 4 to 5 years 40% 5 to 6 years 60% 6 to 7 years 80% Full records of the date, recipient and size of the gift must be kept to enable your executors to complete the IHT forms and make a full disclosure to the Revenue. 8. Gift with reservation of benefit- If you purport to give an asset away at any time but retain an interest in it, the gift will not be a potentially exempt transfer and the full value will be part of your estate for IHT purposes. For example, Ben is a widower and transfers the legal title to his home to your children but continues to live in it rent free. This a gift with reservation benefit and is not an effective gift to reduce the IHT paid on your death. Gifts into trusts are not generally exempt from Inheritance Tax. 9. Note the importance of keeping records- It is essential to keep proper records to enable your executors to claim the proper exemptions. Remember that your executors will be making the claims after you have died and you are unable to clarify matters or provide further information. 5

6 These are complex matters and this statement is provided for general guidance. We will be pleased to provide further advice and guidance to meet your circumstances. Contact details for Wills & Probate Department:- Naomi Pinder Solicitor - Head of Department npinder@jacksoncanter.co.uk John Bradfield-Kay Solicitor jbradfield-kay@jacksoncanter.co.uk Bianca Moran Personal Assistant to Naomi Pinder bmoran@jacksoncanter.co.uk 6