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Key UK inheritance tax considerations in relation to gifting
Below are some answers to a series of key questions that are often asked in relation to gifting.
I am UK resident and UK domiciled. What are the UK inheritance tax consequences of making a gift?
Firstly, consider the nil rate band (“NRB”). The NRB is the part of an individual’s estate which for inheritance tax (“IHT”) purposes, is taxed at 0%. Currently the NRB is capped at £325,000 and, broadly speaking, follows a seven-year cycle at which point it resets.
To the extent that it is not exempt (for which, see below), a lifetime gift to an individual is, under English law, a potentially exempt transfer (“PET”) for the purposes of IHT. No tax arises at the time of the gift (but the NRB is depleted by its value) and if the gift is survived by seven years from the date it is made, no tax will be payable. If the donor dies within seven years, the gift becomes a chargeable transfer and any amount above the donor’s NRB becomes subject to IHT at up to 40%.
Utilising the full NRB is useful for lifetime gifting without incurring tax, and can be an effective estate planning tool for individuals who wish to reduce their UK taxable estate during their lifetime (thereby reducing what is subject to IHT on their death).
Are there any UK IHT tax reliefs or exemptions?
There are a variety of useful tax reliefs and exemptions. Below is a brief summary of the most common and useful exemptions:
Author: George Bull
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- Spouse exemption - gifts made to one’s spouse or civil partner are exempt from tax irrespective of their size, although, see below in relation to spouses with a domicile mismatch.
- Charity exemption – any gift to a qualifying charity is completely exempt if it is used exclusively for the purposes of the charity.
- Annual exemption - you can give away a total of (at present) £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. Gifts or money of this value can be used on one person or can be split (to a maximum aggregate value of £3,000) between several people. You can carry any unused annual exemption forward to the next tax year - but only for one tax year. The UK tax year runs from 6 April to 5 April the following year.
- Small gifts allowance – transfers of up to £250 can be made to as many different people as one wishes. This allowance is not available where a gift exceeds £250, in which case you should rely on your annual exemption.
- Wedding / civil partnership exemption – a gift in consideration of a marriage or civil partnership is exempt up to:
- £5,000 if made by a parent of one of the parties – this is useful as the relief applies ‘per donor’ so each parent could give up to £10,000 i.e. a potential total of £20,000;
- £2,500 if made by a remote ancestor of one of the parties (e.g. a grandparent); and
- £1,000 in any other case.
- Business Property Relief / Agricultural Property Relief – These reliefs are both complex and advice should always be sought to check whether the property qualifies for the relief, but broadly speaking, an IHT relief of up to 100% can be attributed to qualifying business and/or agricultural assets.
Author: George Bull