The restrictive nature of Inheritance Tax law means that it is extremely difficult to give away our own belongings whilst avoiding some tax charge later. Therefore it is best to act as soon as possible but without restricting your own standard of living in the future.
Potentially Exempt Transfers
For a gift to be exempt from IHT the person making the gift must live for more than seven years from the date of the gift. Otherwise some IHT is payable. This may come as a shock to the recipient who may already have spent the gift!
The tax payable on the gift reduces on a sliding scale only if it was made between three and seven years prior to death. After the third year the tax paid on an IHT liability such as this, reduces to 32%. It then continues to taper by 8% each year for the seven year period. If the person making the gift dies before three years have elapsed, no IHT benefits are gained at all and the full tax amount is payable.
Certain gifts are fully exempt from Inheritance Tax irrespective of how long the donor outlives the gift. These are described below:
Marriage Gifts Exemption
certain people are allowed to make cash gifts of varying amounts to somebody getting married. A parent can give up to £5,000 to each of their children, including step-children and adopted children; up to £2,500 to a grandchild or children and up to £1,000 to anybody else.
A single gift of up to £3,000 each tax year can be made to anybody free from IHT. If the £3,000 exemption is not used in one tax year, it can be carried forward to the next year, allowing you to give away £6,000 the following year.
Small Gifts Exemption
Each year you can give away £250 to any number of people without an IHT liability arising.
Normal Expenditure from Income
You can give away any amount of money from your normal income as long as the payments are made on a regular basis, into somebody’s savings account, for example. Essentially, you are giving away money instead of saving it for yourself. However, the gifts must not be so large as to diminish your usual standard of living.
You may also give assets to the following organizations during your lifetime or upon your death without Inheritance Tax being payable:
- Gifts to charities, donations to political parties
- Gifts to national museums, universities and the National Trust
- Donations of National Heritage property to certain non-profit making bodies
- Gifts of land to registered housing associations.
How many gifts can I make?
You can make gifts under more than one of the above headings to the same person. For example, if your child is getting married, you could give £5,000 as a wedding gift and £3,000 as another gift and they would both be exempt.
There are also various assets and investments that are free from IHT subject to certain conditions being met.
The main ones include:
These include shareholding and investments in unquoted companies, including certain stocks listed on the Alternative Investment Market. These are free of IHT if you hold them for at least two years.
Business Property Relief
Most types of business can qualify for BPR. The only restrictions are for businesses whose main activity is dealing in stocks and shares, land, buildings or various other investments.
The extent of the relief will depend on the type of company involved. If you operate your business as a sole trader or partner in a partnership you should qualify for 100% relief, meaning your business assets are disregarded for IHT.
A lower 50% rate of business relief applies to a controlling holding in a fully quoted company. This applies to people who have control on the majority of voting powers on all questions affecting the company.
Any farmland or forestry owned by working farmers can be left without any IHT liabilities as long as it has been owned for at least two years. If the farmland or buildings have been let, they are treated as Potentially Exempt Transfers and you must survive for seven years in order for the property to be passed tax free.