What are the inheritance tax (IHT) implications of giving away assets? What exemptions and reliefs are there for gifts?

At a glance

There are various lifetime and death exemptions and reliefs applicable to inheritance tax:

  • Annual exemption.
  • Spouse exemption.
  • Small gifts and gifts on marriage exemption.
  • Exemption for Gifts out of income.
  • Business and agricultural property relief.
  • Potentially exempt transfers.
  • Charitable donation exemptions.

What’s new?

The Office for Tax Simplification has undertaken a review into ways to simplify Inheritance Tax and have published two reports the second of which makes recommendations including:

  • Replacing the annual gift and gifts in consideration of marriage exemptions with an overall personal gifts allowance and considering the level of these and of the small gifts exemption.
  • Reforming the normal expenditure out of income exemption.
  • Reducing the 7-year period to 5 years; exempting gifts to individuals made more than 5 years before death and abolish taper relief.
  • Considering whether the level of trading activity for Business Property Relief (BPR) should continue to be set at a lower level than that for gift relief  or Entrepreneurs’ relief.

Overview and examples

Spouses and civil partners

Lifetime and death transfers between UK domiciled spouses/civil partners are exempt from IHT. Any unused nil rate band of the first spouse to die may be carried forward and added to that of the second spouse. See Transferable Nil rate band.

There are special rules affecting non-domiciled spouses or civil partners:

  • Up to 5 April 2013 the lifetime limit on the amount that could be transferred to a non-domiciled spouse was £55,000.
  • From 6 April 2013 the lifetime limit on the amount that may be transferred to a non-domiciled spouse is equal to the prevailing nil rate band (£325,000 up to 2017/18).
  • From 6 April 2013 a non-UK domiciled spouse can make an election to become UK domiciled for IHT purposes only. The effect of this is that transfers from their UK domiciled spouse/partner will then be exempt, however they will also then suffer IHT on their assets worldwide. It is possible for the election to apply retrospectively, and it must be renewed if the individual is non-UK resident for four years.
  • See IHT: non-domiciled spouses

Non-domiciled individuals

  • A non-UK domiciled individual is exempt from IHT on non-UK assets, unless a spousal election has been made.
  • Before April 2017 a non-UK domiciled individual became "deemed" as UK domiciled if resident in the UK for 17 out of 20 years. 
  • From April 2017:
    • The number of years of UK residence for deemed domicile to be applicable is reduced to 15 out of the previous 20 years.
    • Individuals will also be deemed domiciled if they were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).
    • The above clauses were included in Finance (No2) Act 2017 effective from 6 April 2017. 
  • An individual who has become UK domiciled and is resident in the UK for the three years before death is also treated as UK domiciled on death.
  • The estate of a foreign domiciliary is excepted, which means that there are no IHT reporting requirements to HMRC, provided they died abroad, they have never held a UK domicile, and the UK assets in their estate, passing by will or survivorship, are shares or cash with a death value of less than £150,000. 
  • See Non-domicile status & tax

Exempt gifts

Certain gifts are exempt from IHT, they include lifetime gifts and bequests (gifts on death) made to:

  • Qualifying charities (UK or EU): see above for conditions for a 4% discount.
  • Community Amateur Sports Clubs
  • Registered housing associations
  • Gifts for national purposes to qualifying bodies (as listed in Schedule 3 IHTA 1984, e.g. the National Gallery, National Trust etc)
  • Gifts to political parties subject to the strict condition of s24 IHTA 1984. See Arron Banks v HMRC.
  • Transfers into Employee Benefit trusts: from 6 April 2014 a transfer of shares into an employee benefit trust is exempt from IHT, see Ownership Trusts.

Lifetime exemptions for gifts of non-business assets

It is possible to make gifts during lifetime which are exempt from IHT, they do not use the nil rate band and they are not potentially exempt transfers (see below). Some of these are annual exemptions meaning that, for example, a small gift of £250 can be made to the same person every year and it will be exempt.

Annual exemption, per year, if all or part has not been used in the previous year, one year may be carried forward

£3,000

Small gift exemption, per person

£250

Gifts on marriage/civil partnership, by:

 

Parent

£5,000

Grandparent

£2,500

Others

£1,000

Exemption for regular gifts out of income

No limit

Lifetime exemptions also include regular gifts out of income, A gift that is normal expenditure made out of income is exempt from Inheritance Tax (IHT).

  • The relief is unlimited: subject only to your levels of spare income.
  • The relief does not apply to gifts of capital: normal IHT limits apply to those.
  • It is important to document your giving to ensure that it receives the correct tax treatment when you are gone.

See IHT: normal expenditure out of income (gifts)

Potentially exempt transfers

Other gifts are taxable if the transferor dies within 7 years of making the gift. The death charge is calculated as follows:

Reduced charge on other gifts made within seven years of death 

 

Years before death

% of death charge

0 -3

100

3-4

80

4-5

60

5-6

40

6-7

20

 

  • Where IHT is due because a PET has failed, the tax is due by the donee unless the will or other document specifies otherwise (for example that the estate should pay the tax).
  • The nil rate band is allocated to failed PET's first and is only then available to the rest of the estate if the value of failed PET's is below the limit.
  • When reviewing the availability of the nil rate band for use against failed PET’s on death, any chargeable lifetime transfers, e.g. transfers into trust, made in the seven years prior to the PET (not the death) must be taken into account. This is known as the 14 year rule.

As part of the OTS’ review into IHT there is a recommendation that the seven year period be reduced to 5 years and that taper relief be abolished.

See: Estate planning checklist

Reliefs from IHT

Business property relief

Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. Relevant property must be held for at least two years in order to qualify for relief.

See IHT Business Property Relief (subscriber guide)

Agricultural property relief

Agricultural Property Relief (APR) is given on the agricultural value of agricultural property which has been:

  • occupied by the owner for the purposes of agriculture for two years ending with the date of the transfer (death), or
  • owned by him for seven years ending with that date and was throughout occupied by him (or another) for the purposes of agriculture.

APR is given at two rates: 100% and 50%

See IHT Agricultural Property Relief

Charitable donations

If a donation of at least 10% of the net value of the estate is made to charity the IHT rate decreases to 36%. However, the charity concerned will receive more if a donor is able to donate under the Gift Aid scheme whilst alive, because the charity will be able to receive a basic rate tax credit. See IHT discount on charitable donations

The deceased's household and personal goods may be donated to charity by beneficiaries without a requirement to make a deed of variation. The value of the donation is exempted as a charitable donation, and may be included in the total in order to calculate a discount.

Donations to charity are only exempt if the charity is subject to the jurisdiction of UK courts, or those of another EU member state.

Responsibility for IHT

  • Tax is payable within 6 months of the end of the month of death, e.g. a death in December 2018 will mean the IHT must be paid by 30 June 2019. 
  • Under s200(1) IHTA the deceased's personal representatives or executors are responsible for settling the IHT of the estate.
  • Where there have been PET’s within 7 years of death and tax is due on death it is the recipient of the PET’s who is liable for the tax.

Capital Gains Tax

Capital gain tax should not be overlooked when gifts of assets are being made. A gift is a CGT disposal at market value. For more details on how to compute CGT on a gift and on available reliefs see How to calculate a capital gain or loss and CGT reliefs: disposal of a business or its assets

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