Inheritance Tax - how much can I give away?

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16 July 2018

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Tax Reliefs including R&D,

Personal Tax Planning

Inheritance Tax (IHT) is chargeable on death at a rate of 40% after deduction of the nil rate band (for 2018/19 - £325,000) and the residence nil rate band (for 2018/19 - £125,000). The residence nil rate band is complex and was the subject of an earlier blog on the following:

net assets in the estate immediately before death
a potentially exempt transfer (PET) made in the previous 7 years
a chargeable lifetime transfer (CLT) made in the previous year

Inheritance Tax reliefs available

no tax is payable on transfers to spouses or civil partners
no tax is payable on gifts to registered charities or community amateur sports clubs
relief is available up to 100% on some business assets and agricultural assets. These reliefs are complex and individuals should seek advice if they think that they could qualify

There are various strategies for mitigating IHT on death. One of the simplest ways of reducing the liability to IHT is to make gifts during lifetime.

Gifts which can mitigate taxation

PETs - generally any gift to an individual is a PET. If the donor survives for at least 7 years the gift falls out of account for IHT. Please note that a gift to a trust is a CLT and consequently will be subject to a 20% charge, should the gift exceed the nil rate band
Annual Allowance - there is an annual tax free amount which can be gifted entirely free of Tax. The amount is only £3,000 and it is possible to carry forward for 1 year any unused allowance. The figure is clearly an anachronism as the value has not increased since 1981!
Small gifts - any number of small gifts, up to £250 each, can be ignored. This figure is also out of date as it has not been increased since 1980!
Gifts out of income - any gifts which can be shown to satisfy the following tests will be treated as exempt :

the gift must be made out of the normal expenditure of the transferor: and
that (taking 1 year with another) it was made out of the transferor's income: and
that after allowing for all transfers of value forming part of the transferor's normal expenditure, the transferor is left with sufficient income to maintain their usual standard of living

It is easy to appreciate that this is an extremely useful relief and potentially enables parents to give financial support to children and grandchildren, provided that there is sufficient income.

In order to claim relief on death, a detailed form has to be completed, which entails providing an income and expenditure account for the transferor for each year that the relief is claimed. Consequently, it is important for anyone who wishes to take advantage of the relief to keep detailed records of not only the gifts but also of all income and expenditure. The executors of the transferor should also be informed so that they can make a successful claim.

If you require any further information on the details of making claims that gifts are made out of normal expenditure and in particular the records that should be maintained, or any other tax matters, please call me on 0113 398 1100 or email ptwhitehead@hwca.com