How does gifting work? – Inheritance Tax edition

If you missed our social media gifting series from June and July, we've consolidated all our posts and are taking the opportunity to delve deeper into the nuances of Inheritance Tax (IHT) and gifting.

Example: Mr. Smith, who died on March 1, 2024, made a cash gift of £500,000 to his daughter in January 2015. Since he survived more than seven years after making the gift, there is nothing to declare to HMRC. 

Understanding the Nil Rate Band and Taper Relief 

When the deceased does not survive the seven-year period after making a gift, the situation can become more complex. If the gifts are within the individual's Nil Rate Band (£325,000), no IHT is due. However, for gifts exceeding the Nil Rate Band, and where the individual survived between three and seven years, taper relief comes into play, reducing the IHT liability over time. 

Key Exemptions and Reliefs 

1. Annual Exemption:  The current annual allowance is £3,000 per tax year. Unused allowances from the previous tax year can also be utilized. Gifts below this threshold do not need to be declared to HMRC. 
2. Small Gifts Exemption: You can give up to £250 per individual per tax year, with no limit on the number of recipients. For instance, if the deceased gave £250 to each of their 275 church parish members, totalling £68,750, these gifts would be covered by the small gifts' exemption. 
3. Marriage or Civil Partnership Gifts: 

   Gifts made on or shortly before a marriage or civil partnership are exempt up to specific limits: 

   • £1,000 to any person 
   • £2,500 to a grandchild 
   • £5,000 to a child 
     
4. Maintenance Payments (S11 IHTA): Payments for the maintenance of a spouse, dependent child, or relative are exempt from IHT. For example, Mrs. Ross, who paid her mother’s care fees for eight years, would have these payments exempted as her mother was a dependent relative. 

Leveraging Charitable Donations 

Leaving a portion of your estate to charity is a meaningful way to support causes you care about while also minimizing IHT. Charitable donations can either reduce the value of your estate before the IHT is calculated or lower the IHT rate if 10% or more of the estate is left to charity. These gifts are entirely exempt from IHT during your lifetime and upon death. 

Gifts Out of Income

Increasingly, individuals are making gifts out of their income, a practice that can qualify for exemption under S21 IHTA 1984. To claim this relief, it must be shown that: 

• The gift was made out of income. 

• The gift did not affect the transferor’s standard of living. 

• The gift was part of the transferor’s normal expenditure. 

Keeping detailed records of income and expenditure, including gifts, simplifies the process of claiming this relief. 

Additional Insights on Gifting and IHT

1. Business Property Relief (BPR):  BPR provides relief on the transfer of business assets, potentially reducing the value of these assets for IHT purposes. Qualifying business assets may be eligible for 50% or 100% relief, depending on the type of asset and the length of ownership.
2. Agricultural Property Relief (APR): Similar to BPR, APR offers relief on agricultural property, which can reduce the value of the property for IHT purposes by up to 100%, provided specific conditions are met.
3. Use of Trusts: Trusts can be an effective tool for managing and distributing assets while minimizing IHT. Various types of trusts, such as discretionary trusts and bare trusts, offer different levels of control and tax advantages. 

Plan Ahead to Maximize Your Estate 

Proper planning and understanding of exemptions and reliefs can significantly reduce the IHT burden on your estate, which is why we recommend seeking specialist wealth and estate planning expert help. 

If you would rather not leave the probate and estate administration process for your family to deal with why not name us as your Professional Executor, our friendly and expert team will get everything sorted and help avoid family disputes. 

However...

With the recent General Election results and landslide win for the Labour Party we can expect changes to these rules as they have made it very clear that they intend to reform IHT.  

What the actual changes are and when, we don’t yet know., however you can trust us to keep you updated. 

Kings Court Trust is a probate and estate administration provider that offers award-winning solutions to support every family.

Whether you need a hand obtaining the Grant of Representation, completing the complicated tax and legal work, or anything in between, you’re in safe hands with our team of specialists.

If you have any questions about the estate administration process, including applying for the Grant of Representation, call our Client Services Team on 0300 303 9000 or fill in the form below.