Making gifts during your lifetime can reduce the amount of IHT which has to be paid. Lifetime gifts fall into one of the following three categories: exempt transfers; chargeable lifetime transfers and potentially exempt transfers.
Exempt transfers fall into two categories, transfers which are exempt if made during your lifetime or at death, and transfers which are exempt only if made during your lifetime.
Transfers of any amount to a UK domiciled spouse or registered civil partner or between a non-UK domiciled spouse or registered civil partner. Transfers by a UK domiciled spouse or registered civil partner to a non-UK domiciled spouse or registered civil partner up to the nil-rate band (currently £325,000), and unlimited if an election is made by the non-UK domiciled spouse or registered civil partner to be treated as UK domiciled for the purpose of IHT. If such an election is made, it allows an unlimited exemption for transfers of property between a spouse and registered civil partner, but it also brings the whole estate of the non-UK domiciled spouse or registered civil partner into the UK IHT regime. Gifts to charities.Gifts of agricultural or business property (which can qualify for 50% or 100% depending on the nature of the property).
Gifts on marriage. A mother or father can give up to £5,000 to their son or daughter free of IHT. Wedding gifts of up to £1,000 can be made by any person free of IHT. Small gifts of up to £250 per donor per tax year. Normal expenditure out of income provided that it leaves you with sufficient income to maintain your normal standard of living. Payments for family maintenance.An annual exemption of up to £3,000 in a tax year. Any unused annual exemption may be carried forward for one tax year only.
A Chargeable Lifetime Transfer (CLT) is any lifetime transfer that is not classed as exempt or potentially exempt. For example, gifts into discretionary trusts during your lifetime or the settlors. Sometimes the settlor can also benefit from the assets in a trust – this is called a ‘settlor-interested’ trust and has special tax rules. The tax principle that applies to CLTs is that at the time of the transfer, IHT (at the lifetime rate of 20%) is due on the value of the transfer in excess of the unutilised nil-rate band. The IHT can be paid by the donee or you, the donor. Where you pay the IHT the tax payable is also a chargeable transfer meaning that the effective rate of IHT is 25% on the net gift before tax. If the donor survives for 7 years there is no further IHT to pay. Should you die within 7 years then further tax is payable. The above ignores periodic and exit charges that may occur within a discretionary trust.
All gifts between individuals are PETs.A PET is treated as an exempt transfer while you are alive, and so PETs will not give rise to a lifetime IHT charge. A PET becomes an exempt transfer if you survive for seven years from the date of the gift. If you die within seven years, an IHT charge will arise and tax will be payable by the donee. Taper relief reduces the tax payable where there are more than three years between the date of the gift and the date of death.
The amount of IHT payable is not static over the seven years prior to death. Rather, it is reduced according to a sliding scale dependant on the passage of time from the giving of the gift to your death. No relief is available if you pass away within three years of the lifetime transfer. For survival for between three and seven years, taper relief at the following rates is available.
The rate of IHT gradually reduces over the seven-year period (taper relief ). It works like this:
|*How long ago was the gift made?||**How much is the tax reduced?|
|*0-3 years||**No reduction|
|More than 7 years||No tax to pay|