IHT is considered by many to be an unfair tax, and some would go as far to say it is a form of double taxation. An individual builds up wealth during their lifetime, on which they would have paid tax on, only for that wealth to be assessed to further taxation on death.
With early lifetime planning and taking advantage of the various IHT exemptions and reliefs, an individual can reduce their exposure to IHT, increasing the amount that is available to pass on to their beneficiaries on death.
Potentially exempt transfer
An outright gift to an individual during a person’s lifetime will be regarded as a potentially exempt transfer (Pet), to the extent it does not fall within one of the exemptions (see below). However, it is important to note that transfers between spouses are generally exempt.
Where a Pet is made, no IHT is immediately due and the gift will be exempt if the individual survives seven years from the date of the gift. If the individual dies within the seven-year period, the gift would form part of their estate for calculating the IHT due. If the individual dies more than three years after the gift, the rate of IHT is reduced (or tapered) by 8 per cent each year, until the seventh year when it is nil.
Immediately exempt transfers
There are several exemptions in relation to lifetime gifts whereby the gift is immediately exempt that is, the individual does not have to survive seven years for the gift to be disregarded for calculating IHT.
The main exemptions are as follows:
Annual exemption of £3,000, where the allowance is not used in a year, it can be carried forward to the next tax year
‘Small’ gifts exemption of £250 to any person
Gifts in consideration of marriage/civil partnership –
* £5,000 by a parent
* £2,500 by a grandparent or great grandparent
* £2,500 by a party to the marriage
* £1,000 by any other person
Gifts to UK registered charities and those registered in the EU, Norway and Iceland
Gifts to UK political parties
Gifts for national purposes, gifts to certain national institutions, such as museums, art galleries and universities
Normal expenditure of out income exemption
In addition to the exemptions listed above, a valuable exemption applies to "gifts out of surplus income". Gifts which meet the qualifying conditions of this exemption are immediately exempt from IHT and the individual does not need to survive seven years.
There is no set limit on the amount that can be given away, provided the gift does not exceed ‘surplus income’.
The qualifying conditions in order for the gift to fall within the exemption are as follows:
The gift is made as part of the normal expenditure;
Taking one year with another, the gift it is made out of surplus income (but not capital); and
Taken together with all the transfers that form part of the individual’s normal expenditure, the individual is left with sufficient income to maintain their usual standard of living.
IHT reliefs
Business property relief (BPR) and agricultural property relief (APR) may reduce the amount chargeable to IHT by 100 per cent or 50 per cent.
