Many people refer to Inheritance Tax (IHT) as being the "death tax", not realising that actually it can also be charged during an individual's lifetime on any chargeable transfer of value, such as a gift to another person or into Trust. In some circumstances a transfer of value can be an exempt transfer, i.e. it will never be subject to IHT and we will look at the available exemptions and reliefs in this blog.
Nil Rate Band
Every individual has a Nil-Rate Band (NRB) and this has been set at £325,000 since 6th April 2009 and will continue at this rate until 5th April 2021. If a chargeable transfer of value falls within the NRB, then no IHT is payable, i.e. if the gift is below £325,000 then no IHT is payable.
Over the years, the NRB has been enhanced to include the introduction of the Transferable Nil Rate Band (TNRB) and the Residence Nil Rate Band (RNRB). The TNRB applies to deaths on or after 9th October 2007, whereby an individual's estate can also benefit from a transferable NRB from a deceased spouse of civil partner. The RNRB applies to deaths on or after 6th April 2017 and where the main residence is being passed to direct descendants. The rate is set at £175,000 per person and can also be transferred following the death of a spouse or civil partner. This effectively means that subject to qualifying for the TNRB and RNRB, a couple can have a combined estate of £1 million before Inheritance Tax is payable.
Registered Legal Partner Exemption
Generally any gifts between UK domiciled spouses or civil partners are exempt. This also applies to those who are legally separated. For transfers to a non-UK domiciled spouse, these are exempt only up to the lifetime level; currently £325,000, which was increased from £55,000 on 6th April 2013. This exemption must be used before any other exemption.
Potentially Exempt Transfer (PET)
A PET applies a 'wait and see' approach and so when the gift is made this is treated as being exempt. If the donor (the person giving the gift) dies within 7 years of making the gift then it will become chargeable to IHT. Not every gift made during an individual's lifetime can be treated as a PET, for example the creation of a Discretionary Trust or a gift where the donor retains a benefit.
There is an annual allowance of £3,000 available to every donor and must be applied against the first gift in the tax year. It is possible to carry-forward one year of any unused allowance, but the current year's allowance must be utilised first. This is a lifetime allowance and cannot be used to reduce the value of an estate on death.
Normal Expenditure out of Income
If it can be evidenced that gifts are regularly made our of income and the donor still has sufficient means to maintain their usual standard of living then these gifts can be immediately exempt and without having to wait for 7 years.
A donor can make a series of small gifts of £250 per recipient per tax year. There is no limit to the number of individual recipients.
Gifts in consideration of marriage
Any gift made in consideration of a marriage or civil partnership are exempt but only if the gift is made prior to the marriage or civil partnership taking place. The amount is set at £1,000 from any person, £2,500 from a grandparent or more remote ancestor and £5,000 from a parent.
Agricultural Property Relief (APR) and Business Property Relief (BPR)
These Reliefs apply where the transfer of value includes agricultural or business property and the rate applicable is either 100% or 50% depending on the type and use of the assets.
Gifts to Charities and Political Parties
In general, gifts to charities are fully exempt from IHT and 100% relief is available for gifts to political parties.
Other Reliefs and Exemptions
Employee trusts have favourable IHT status.
Woodlands relief is only applicable to gifts on death only.
Inheritance Tax can be complex because of the many circumstances in which it can apply and the rules that determine the availability of reliefs and exemptions, for example many of these have to be applied for and are not automatic. For this reason, individual's may benefit from professional guidance.