You are able to make a number of small gifts each year without creating an IHT liability. Remember, each person has their own allowance, so the amount can be doubled if each spouse or partner uses their allowances.
You can also make larger gifts. These are known as Potentially Exempt Transfers (PETs) which may still result in IHT liability if you die within seven years of making them.
Any other gifts made during your lifetime which do not qualify as a PET will immediately be chargeable to IHT.
These are called Chargeable Lifetime Transfers (CLT) and an example is a gift into a Discretionary trust.
The taxation rules of CLT’s are quite complicated and you should speak to a tax adviser if you are considering a CLT.
H M Revenue & Customs permits the following as exempt transfers:
- Up to £3,000 each year as either one or a number of gifts. If you don’t use it all up one year you can carry the remainder over to the next tax year only. A tax year runs from the 6 April one year to 5 April in the next year.
- Gifts of up to £250 to any number of other people – but not those who received all or part of the £3,000.
- Any amount from income that is given on a regular basis provided it doesn't reduce your standard of living. These are known as gifts made as 'normal expenditure out of income'.
- If your child is getting married you can gift them £5,000. If a grandchild or more distant descendent is getting married, £2,500, and a friend or anyone else you know, £1,000.
- Donations to charity, certain political parties, universities and certain other bodies recognised by HM Revenue & Customs.
There are certain other gifts that can qualify for relief from IHT. These can include gifts of a small business, sole trader enterprise or partnership and shares in companies listed on the smaller more risky stock exchange, the Alternative Investment Market (AIM).
Farmers can also gain up to 100% relief from IHT when making gifts of certain agricultural land or farm buildings. The rules in both these situations, known as business and agricultural relief respectively, are complex and we would recommend you seek expert advice before taking action.
Members of the armed forces killed in action or whose death is hastened by injuries sustained on active duty are also exempt from IHT.
Potentially Exempt Transfers (PETs)
These are transfers which may be exempt if you live for more than 7 years from when the gift is made, but would still result in IHT liability if you die within seven years of making them.
If you die within 7 years of the gift, tax, or additional tax may become payable on your death in respect of gifts made during your lifetime. Taper Relief may apply which works on a sliding scale. The relief is given against the amount of tax the recipient would have to pay rather than the value of the gift itself. The value of the gift is set when it is given, not at the time of death.
To discuss the options available and the most appropriate tax planning for your particular circumstances, please contact us.