Tis the Season to Gift!

As the countdown to Christmas continues, most of us will be thinking about the big day and the presents we would like to give to our loved ones.

What many of us are unlikely to be thinking about are the possible inheritance tax (‘IHT’) consequences that could result from our generosity. As the recent Autumn Statement failed to include any mention to the ‘death tax’, the current rules are here to stay until at least Spring 2024. Whilst the majority of casual monetary gifts may fall within HMRC’s allowable limits, it is worth bearing in mind the current rules when considering making more generous gifts this Christmas.

What is Inheritance Tax?

IHT is primarily a charge on your assets on death, including your share of assets jointly held with others and foreign assets.  Lifetime gifts made in the seven years before your death can also be brought back into account.

Generally every individual is entitled to an allowance of £325,000 (‘NRB’), and potentially a further allowance of £175,000 (‘RNRB’) for IHT. The RNRB may be available if you have a property in your estate and leave it in your Will to your children, grandchildren or step-children.

The NRB is subject to any lifetime gifts that you may make, but generally IHT is payable at 40% above any available allowances on death.

The main exemptions

Certain gifts are exempt from IHT and do not use up your nil rate band. The main exemptions include:-

• Spouse exemption: Gifts to your spouse or civil partner are free of IHT.
• Charity exemption: Gifts to charity are free of IHT.
• Annual allowance: In every tax year, an individual may gift a total of £3,000 without attracting a charge to IHT. For an individual who did not make any gifts in the previous tax year, they can carry one annual exemption forward and pass on £6,000 in that tax year. The exemption can only be carried forward one tax year.
• Small gift exemption: Additional tax-free gifts of up to £250 per individual can be made on customary occasions including Christmas and birthdays provided the recipient has not already benefited from the individual’s annual exemption.
• Wedding or civil ceremonies: A parent may give their child up to £5,000 free of IHT as a wedding present. A grandparent may give up to £2,500.
• Gifts out of surplus income: This rather complicated rule allows individuals to make regular gifts out of their surplus income, which will then fall outside of the individual’s estate on their death provided the gifts do not have an effect on the individual’s standard of living. If you intend to rely on this exemption, it is extremely important that   records are kept of the gifts which have been made from year to year as the gifts will need to be reported to HMRC after death. It is normally appropriate to engage an accountant’s assistance at this stage.

This is a complex and occasionally contentious area of tax law and we would recommend you speak with an advisor before attempting to utilise this exemption.

If your estate includes agricultural or business property then, subject to certain conditions, relief from IHT on some or even all of those assets may be claimable.  Again, specialist advice should be sought in order to maximise the chance of securing relief on these types of assets. 

Potentially exempt transfers

Other gifts that you may make would be subject to the ordinary 7 year gifting rules whereby you must outlive a gift by 7 years for the value to fall outside of your estate for IHT purposes. These are known as ‘potentially exempt transfer (‘PETs’)’.  If the individual dies within 7 years of making the gift, their NRB is reduced by the total value of the gift.

Some lifetime gifts can be immediately chargeable to some IHT and further tax if you then die within 7 years of that gift.  If you are considering making a high value gift to an individual or a trust, then it is advisable to take specialist advice on the tax consequences of that gift (IHT and also possibly capital gains tax). 

IHT is also charged where an asset has been given away but where, in fact, you retain the use of the asset either directly or indirectly (this is referred to as a “gift with reservation of benefit”).

Who pays IHT?

IHT is generally paid by your estate but if lifetime gifts are subject to IHT, the recipient of the gift can be liable to pay the resulting tax.

Are there other ways to mitigate IHT on my death?

There are various other ways and vehicles which with careful planning, could be used to reduce the IHT your beneficiaries may be required to pay on your death. We would strongly recommend you obtain specialist tax planning advice should you wish to explore any of the other options.

Should you have any questions about lifetime gifting and inheritance tax, or if you wish to update your Will as a component of your wider estate planning, please do not hesitate to contact a member of the Private Client department.