Meg Saksida explores the inheritance tax exemptions available for lifetime gifts.
In the last few months, many of the UK’s media publications have been commenting about IHT. “The rich are avoiding IHT by using ‘loopholes’ and advisers with ‘a kitbag of tricks’, and ‘IHT is a voluntary tax’” are but a few of the examples.
What is the crucial information that the average person who fears they may fall within the IHT net learn about IHT, to establish whether they are, in fact, potentially subject to this tax; and if so, what can they do during life, before it is too late?
IHT is not a death tax
The first crucial thing to know about IHT is that it is not a ‘death tax’. It is a gift tax, taxing a ‘transfer of value’ from one individual to another individual or structure (such as a trust).
We gift the greatest when we bequeath our assets on our death; subsequently, IHT tends to be associated with death. It can, however, be charged and mitigated in life.
On whom is it taxed?
IHT is taxed on individuals domiciled in the UK on their worldwide assets, or those who are non-UK domiciled but owning assets in the UK.
Domicile is different from residence. You can be resident in the UK but non-UK domiciled. Your domicile is a legal concept which is either attached to you through common law or through tax law. At common law, it is essentially where your heart is; where you wish to remain/reside permanently. ‘Deemed’ domicile, a tax law concept, attaches domicile to an individual depending on how long the individual has been living in the UK.
On how much is it taxed in life?
IHT is taxed at 0% on gifts under the nil rate band (currently at £325,000). If a gift is chargeable in life, the rate is half the death rate (currently at 40%); 20%.
This is a cumulative tax. At every chargeable gift, any previous chargeable transfers made in the last seven years will be taken into account; therefore, once seven years has passed, any gift older than this will normally slip out of the calculation.
What gifts are ignored in life?
Gifts not intended to confer a gratuitous benefit, such as accidentally making a sale at under market value (‘bad bargains’) are ignored. Maintenance of spouses/civil partners (CPs), minor children (and those in their majority but in full-time education) and dependent relatives are also ignored.
If you choose not to receive a dividend or your salary, this is generally not deemed to be a gift.
What are the lifetime exemptions?
Gifts between spouses and civil partners are free of IHT unless the donor spouse/CP is UK domiciled and the donee spouse/CP is non-UK domiciled (where there is a maximum lifetime transfer of £325,000). Gifts between other individuals are exempt if the donor survives for more than seven years.
There is an annual exemption per annum, per individual of £3,000; and the previous year’s annual exemption could also be used after this year, if not used already. Up to £5,000 can be given as a gift on a marriage, depending on the relationship to the donee. Gifts to registered charities, housing associations, and political parties are generally IHT free. Small gifts of up to £250 per person per annum are also IHT free.
Finally, the gift will be exempt if it follows a regular pattern, is made out of income and the taxpayer can maintain their standard of living after the gift.
Practical Tip
There are several more exemptions available in life, and even more on death. The above is only an extremely brief outline. Take specialist tax and financial advice based on your particular circumstances.
