Many people want to give gifts to family and friends during their lifetimes. Not only does this mean that you can see loved ones benefit whilst you are alive, it can also reduce the value of your estate for inheritance tax purposes.
However, the rules surrounding lifetime gifts and estate planning are complex. If you are considering making a gift, it pays to take professional advice to ensure your gift is exempt from inheritance tax.
There are a variety of exemptions and allowances which can be applied to gifts, making them free from inheritance tax:
An individual can make gifts of up to £3,000 per year without incurring an inheritance tax liability. This can be for a number of gifts, so long as they do not exceed £3,000. If part of this £3,000 annual exemption is unused, you can carry it forward, but for one year only.
Small gift exemption
You can make as many gifts as you like of £250 per person and this sum will not be subject to inheritance tax. However, the small gift exemption must not be used against a gift over £250.
Gifts to spouses are exempt from inheritance tax, as are gifts to charities.
Gifts to someone in relation to their marriage can be exempt. This means that parents can give a child who is getting married up to £5,000. A grandparent can give up to £2,500, and you can gift other relatives or friends up to £1,000.
Gifts to help with family maintenance, which could mean looking after a dependent or supporting an ex-spouse or child under 18, can also be free from inheritance tax.
Gifts out of surplus income
An often-overlooked exemption is that of gifts out of surplus income – these gifts should not come from capital. The rules for this exemption are complex so it is essential that you keep good records of any gifts you make. It must be clear that there was surplus income available to make the gifts which does not affect your standard of living. These gifts must be made on a regular basis, or there must be a pattern of payments.
Potentially exempt transfers
A potentially exempt transfer (PET) enables you to make a gift of any value which becomes exempt from inheritance tax if you live for a further seven years. If you die within seven years of making the PET, it becomes chargeable and is added to the value of your estate for inheritance tax purposes (using up part or all of your Nil Rate Band – see below).
The Nil Rate Band
Each estate is subject to Inheritance Tax at a rate of 40% on death and 20% on lifetime transfers. A tax free allowance called the ‘Nil Rate Band’ is available for each individual. For 2019/20 this is £325,000. So the first £325,000 of your estate is taxed at 0%.
An additional allowance called the ‘Residence Nil Rate Band’ is available on deaths after 6 April 2017 where an individual with an interest in a qualifying residence passes it to direct descendants. For 2019/20 the relief is £150,000.
Making gifts and transfers during your lifetime can be effective for tax planning, but with the law and rules surrounding these gifts being complex, it is best to obtain advice from an expert in estate planning.
At Moore Blatch, we have a specialist Private Wealth team who would be happy to help with any queries you may have.
If you need advice in relation to gifts and inheritance tax, please contact Associate Solicitor, Kate Marsh by email: Kate.Marsh@mooreblatch.com or call on 01590 625832.