A. EXEMPT TRANSFERS

Provided these gifts satisfy the following conditions they are completely exempt from Inheritance Tax.

 

1. Small Gifts

A Donor may make any number of gifts of up to a total of £250 each gift per fiscal year free of all Inheritance Tax.

The sum of up to £250 per annum may be given to any number of people but may not be given to the recipient of a gift of £3,000 under the annual exemption – see below.

 

2. Annual Exemption

A Donor may give up to £3,000 by way of gift either to one person, or of lesser amounts totalling not more than £3,000 to two or more persons, in any one fiscal year.

It is possible to also bring forward any part of the unused exemption from the previous year for one year only, provided the current year’s exemption has already been utilised.

Gifts under this exemption should not be made to the same person as the gifts under the small gifts exemption.

 

3. Normal Expenditure out of Income

A lifetime gift is exempt if:

  • it is shown that it was made as part of the normal expenditure of the Donor and that it was made out of income (i.e. not capital) and that
  • after taking into account all such gifts forming part of his/her normal expenditure, the Donor was left with sufficient income to maintain his/her usual standard of living.

The extent of such exemption depends entirely upon the circumstances of each individual involved.

 

4. Gifts in Consideration of Marriage

The following gifts may be made:-

  • £5,000 by a parent of either of the parties to the marriage
  • £2,500 by one party to the marriage to the other, or by a grandparent or remoter ancestor
  • £1,000 in any other case

If the gift is in excess of the exemption the amount in excess will amount to a Potentially Exempt Transfer (see below).

The four above exemptions apply separately to husband and wife and civil partners.

 

B. LIFETIME GIFTS- POTENTIALLY EXEMPT TRANSFERS

1. Introduction

HM Revenue & Custom’s HMRC technical term for lifetime gifts is Potentially Exempt Transfers. Such transfers should more properly be called potentially taxable transfers.

There is no Inheritance Tax on lifetime gifts provided the Donor survives for seven years or more from the date of the gift. The Donor may give as much as he/she likes to any one or more persons during his lifetime.

If the Donor survives for seven years, the gift is not included in the estate when calculating its size for Inheritance Tax purposes. If the Donor dies within seven years of the gift, the gift will be aggregated with his/her estate for Inheritance Tax purposes.

 

2. Tapering Relief

If the Donor dies between three and seven years of making the gift, there is tapering relief available PROVIDED the original gift is larger than the general nil-rate band available at death (£325,000 for deaths up to 5 April 2028). There is a sliding scale of relief, as follows:

Years between transfer and death Percentage of full tax rate
more than 3 but less than 4: 80%
more than 4 but less than 5: 60%
more than 5 but less than 6: 40%
more than 6 but less than 7: 20%

If the lifetime gift falls within the general nil-rate band then there will be no tax due on that gift. It will simply be set against the deceased’s remaining general nil-rate band reducing or possibly exhausting the nil-rate band available to the beneficiaries of the estate passing at death.

Care should therefore be taken when making lifetime gifts if a Donor has also included in his Will a gift expressed to be of a sum of money equivalent to the general nil-rate band. If his lifetime gifts use up the general nil-rate band, such a legacy on death will fail.

In addition, if the general nil-rate band has been utilised for lifetime gifts, all of the deceased’s estate will be taxed at 40%, reducing the monies received by the beneficiaries under the Will.

 

3. Reservation of Benefit

HMRC has provided that if the Donor retains any benefit in an asset which the Donor has given away during his/her lifetime then this will invalidate the gift for Inheritance Tax purposes and the asset will still form part of the Donor’s taxable estate on his or her ultimate death.

The most obvious example of retaining a benefit is where the Donor gives all or a share in his/her home to adult children who live elsewhere and then continues to live in the house on a rent-free basis.

 

4. Pre-owned Assets

If the Donor of a gift is not treated as having made a Reservation of Benefit but the Donor originally provided the assets from which the Donor now derives a benefit there may be a PreOwned Asset Tax POAT liability. This is an annual Income Tax charge on the Donor and there are separate rules for the tax treatment of land, chattels and intangible property.

For example, parents sell their family home and give monies to their children. The children then use those monies to buy a property in their name and the parents then immediately move into that property. This arrangement will be caught by the POAT rules.

 

5. Relevant Property Settlements RPS (formerly Discretionary Settlements)

Gifts into RPS are not Potentially Exempt Transfers. If you are considering creating such a settlement, please see our separate guidance notes.

 

6. Capital Gains Tax Trap

When making lifetime gifts, beware of the Capital Gains Tax trap. A lifetime gift in kind (as opposed to cash), for example a gift of property or shares may well give rise to an immediate charge to Capital Gains Tax on the Donor if the asset transferred has increased in value between the date the Donor acquired it and the date it was given away. Additionally, as stated above, a death within seven years of a gift can give rise to Inheritance Tax, thus creating the risk of a double charge to tax. The gain in value of any asset that a Donor wishes to give away must be considered carefully in light of this.

 

C. INHERITANCE TAX AND THE NIL RATE BAND

Every individual can give up to £325,000 on his or her death without Inheritance Tax becoming payable. Over £325,000 Inheritance Tax is charged at 40%.

There is the potential for a reduced rate of Inheritance Tax of 36% as opposed to 40% where 10% or more of the estate has been left to charity. There are a number of factors that need to be taken into account when calculating whether the 36% rate of tax will apply. If this is of interest, please contact one of the solicitors in our Private Client Department.

There is no Inheritance Tax on assets which pass between spouses and civil partners. In the case of both spouses and civil partners, the current position is that if on the death of the first to die that person’s nil-rate band has not been utilised, then when the second spouse or civil partner dies, their estate for Inheritance Tax purposes will be reduced by two full general nil-rate band.

If on the death of the first spouse or civil partner, some of that person’s general nil-rate band was utilised, then only the unused proportion of that spouse’s general nil-rate band can be utilised when the second spouse or second civil partner passes away.

For example:

On the first death none of the original general nil-rate band was used because the entire estate was left to a surviving spouse or civil partner Then if general nil-rate band when the surviving spouse or civil partner dies is £325,000, that would be increased by 100% to £650,000.
If on the first death the chargeable estate is £162,500 and the general nil-rate band is £325,000, then 50% of the original general nil-rate band would be unused. If the general nil-rate band when the surviving spouse or civil partner dies is £350,000, then that would be increased by 50% to £525,000.

The personal representatives of the first-to-die spouse or civil partner will not have to make a claim for the unused general nil-rate band to be transferred at the time of the first death. Any claims for transfer of unused general nil-rate band amounts will be made by the personal representatives of the estate of the second-to-die spouse / civil partner, when they make the Inheritance Tax return in that person’s estate.

 

Residence Nil-Rate Band

What is it?

An additional residence nil-rate band for Inheritance Tax came into operation in respect of estates where the deceased died on or after 6 April 2017. This residence nil-rate band is in addition to the general nil-rate band of £325,000 for an individual and

£650,000 for married couples/civil partners.
The residence nil-rate band is currently £175,000 per spouse/civil partner.

 

What does it apply to?

As the name suggests, the residence nil-rate band applies to a residential property in an estate. Only one residential property can qualify for the allowance. If a deceased has multiple properties, the personal representatives will be able to nominate which residential property should qualify. However, it has to have been the residence of the deceased.

 

Who does it apply to?

The residence nil-rate band only applies to people who leave their residence to lineal descendants. Lineal descendants are defined as including children, adopted children, step-children, foster children and grandchildren.

More surprisingly perhaps, it also extends to the natural children of parents where those natural children have been formally adopted. This is contrary to the rule that an adopted child is treated, in law, as if they were not the child of any person other than the adopters.

 

What if you downsize or go into care?

The residence nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the residence nil-rate band, are passed to lineal descendants on death.

 

Is there a limit?

There will be a tapered withdrawal of the residence nil-rate band for estates with a net value of more than £2million. This will be a withdrawal of £1 for every £2 over this amount. If the estate is more than £2.35million (if only a single residence nil-rate band is being utilised) or £2.7million (if both residence nil-rate bands are available), it will be lost.

 

D. ISAS

Where an ISA holder dies on or after 3 December 2014, their surviving spouse or civil partner can inherit their ISA tax benefits. This takes the form of an additional permitted subscription limit equal to the value of the ISA at the holder’s death and will be in addition to the survivor’s own ISA allowance.

There is a time limit in which the claim must be made.

 

E. PENSIONS

As from 6 April 2015, there are new options for individuals to take out funds from their pension. Most pension investors aged 55 or older will enjoy almost total freedom of choice over how they use their pension to fund their retirement. There are also new tax breaks for passing on pensions when you die.

 

F. DEEDS OF VARIATION

Currently, any beneficiary of an estate can, if he or she wishes, re-direct some or all of an inheritance that they receive either by Will or intestacy to their chosen recipient. The only requirement is that the Deed must be made within two years from the date of death of the deceased person who had made the original gift.

 

These notes are not exhaustive and are meant as a basis for discussion with your legal adviser. If clients wish to discuss any of the above, please contact our Private Client Team 020 8940 4051 who will be pleased to help you.

IMPORTANT: this information is intended to be a general statement of the law. No action should be taken in reliance on it without seeking specific legal advice.

Our Private Client team

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Gregory White

Private Client department
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Dixon Ward | Wills, Powers of Attorney, Probate & Trusts | The Team | Abigail Pfister

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Private Client department
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Dixon Ward | Wills, Powers of Attorney, Probate & Trusts | The Team | Paul Denza

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Private Client department
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Dixon Ward | Wills, Powers of Attorney, Probate & Trusts | The Team | Reena Khatri

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Private Client department
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Dixon Ward | Wills, Powers of Attorney, Probate & Trusts | The Team | Sabrina Caldeira

Sabrina Caldeira

Private Client department
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Dixon Ward | Wills, Powers of Attorney, Probate & Trusts | The Team | Shaun'Tay Saunders

Shaun’Tay Saunders

Private Client department
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