As the end of the tax year approaches you should be maximising your opportunities for inheritance tax reliefs including taking advantage of exempt lifetime gifts and transfers.
Margaret Rowe, a Partner in our Wills, Trusts and Estate Planning team, examines the regulations:
Gifts and exemptions
There is an opportunity to mitigate inheritance tax by making smaller gifts out of surplus income.
Everyone can make use of the £3,000 per annum annual exemption, which can be used to make gifts up to the total each year, and if the allowance is not used fully in any year, it can be carried forward one year.
On top of the annual exemption, the rules on small gifts allow individuals to gift up to £250 per recipient per year with no limit to the number of recipients. However, if you give more than £250 to any individual, you lose the exemption completely, even on the first £250. And you can’t use your small gifts allowance together with any other exemption when giving to the same person.
Looking at these two allowances together, if you had three children, ten grandchildren and four godchildren, you could make gifts of £1000 to each of your three children by using the annual exemption of £3,000 for all such gifts.
Then you could give up to £250 per year to each of your grandchildren and godchildren using the small gift exemption. You cannot make an exempt small gift to your children as you have already used the annual exemption to make a gift to them. These allowances are automatic, but it’s a good idea to log and track the gifts as it makes it easier for your executors and simplifies dealing with HMRC.
Another opportunity is relief on gifts made out of surplus income, but your executors must claim the exemption for these gifts after your death. Here, good recordkeeping is vital, because to qualify as normal expenditure out of income it must:
- Be part of a regular pattern of giving
- Taking one year with another, be made out of income
- After the gifts and other usual expenditure, you must be able to maintain your normal standard of living
So, to make such payments, you need to record in writing that you intend to make the gifts regularly and then keep a record of income and outgoings so that your executors will be able to demonstrate that you had surplus income from which the payments were made.
Examples of the sorts of payments range from regular monthly payments to a grandchild’s savings account or payment of school fees through to regular gifts on special occasions.
Any other lifetime gifts you make, other than gifts into a trust, are known as potentially exempt transfers (PETs). A PET becomes an exempt gift if you survive the making of the gift by seven years. However, if you die within seven years of making the gift, the value must be brought into account when calculating inheritance tax due from the estate.
Tapering relief may be available on the tax attributable to PETS if you die more than three years after the gift, but only if the total value of the lifetime gifts made in the seven years before your death exceeds the nil rate band in force at your death.
If you’re concerned about inheritance tax and hope to mitigate it through gifting, asset transfer or the new residential property allowances, it’s important to check the position regularly. Getting it right, and reviewing any existing will, is key to making sure reliefs are maximised.
If you’d like to know more contact Margaret on 01952 208433 or firstname.lastname@example.org.