Last year, the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness published a report, Reform of Inheritance Tax, with two major recommendations for the government to reform the UK’s current inheritance tax (IHT) regime. The report calls for the introduction of a flat-rate gift tax, which would replace the current IHT system’s array of reliefs and exemptions.
Submissions to the Parliamentary Group are still being made even as we speak, and by organisations such as my own professional body the Society of Tax and Estate Practitioners (STEP), but it does look like change is in the wind, and that prompts us to suggest a review of any IHT gifts plans.
So, what are the key rules about Lifetime Gifts? Please note this is not a comprehensive summary of Lifetime Gifting or of IHT overall.
- The IHT Threshold: The current starting threshold for inheritance tax for a single person is set at £325,000. This amount is then doubled for married couples and civil partners, who also have the additional benefit of the residential nil-rate band, which allows for a further £175,000 of tax-free, property-based inheritance per person if you leave it to your children (including adopted, foster or stepchildren) or grandchildren, and your estate is worth less than £2 million.
- Potentially Exempt Transfers (PET): Most gifts made by an individual during their lifetime to another individual will be exempt from IHT unless the donor dies within seven years of making the gift. An unsuccessful PET is taxed depending on how long the donor has lived following the giving of the gift and is referred to as ‘taper relief’. This relief reduces the amount of tax payable not the value of the gift. If a gift is made less than three years before death, the full rate of 40% IHT is applied to the gift, tapering off to 8% if the gift was made between six to seven years before death.
- Tax-free Gifts: These include gifts to spouse or civil partner; gifts to charities and qualifying political parties; and help with another person’s living costs (e.g. elderly relative/child under 18).
- Annual Exemption: You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year.
- ‘Normal’/Regular Gifts paid for out of Income: Only if they are made as part of your normal expenditure and are made out of your ‘natural’ income and, after allowing for all transfers taken from normal expenditure, you are left with sufficient income to maintain your usual standard of living, and the payments are habitual or regular. HMRC’s example is “paying for a meal”! But there are other opportunities!
- Gifts in Consideration of Marriage/Civil Partnership: Up to £5,000 depending on your relationship to the recipient.
- Small Gifts Exemption: For smaller gifts, you can make as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
- Gifts with Reservation: Be aware when it comes to transactions with a reservation of benefit. For example, if you give away your home to your children and continue to occupy it rent-free, the property is still considered as forming part of your estate immediately if the worst were to happen. An individual cannot retain possession of a chattel or property whilst making a PET.
Though it may be difficult to plan for the worst, knowing how to best mitigate the tax surrounding gifts and inheritance can help you make key financial decisions at the most opportune moments, and prevent any avoidable losses when it comes to sharing your assets with the people and organisations that matter most to you.
Note: Potential changes should not encourage you to act or refrain from acting regarding your financial planning until you have taken appropriate professional advice. But it is a nudge if you have any IHT planning to do before the end of the tax year.
NB The notes above are necessarily brief and only cover some of the main points. If you think any of the above may apply to you, we recommend that you take timely advice from an appropriate professional adviser.
And remember, do not hesitate to contact us to discuss your financial planning needs. Reviews are part of our added-value services for our clients – we are here to help.
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