On death, an individual’s estate will be subject to inheritance tax (IHT) at a rate of 40% if it exceeds the available nil rate band (NRB), before any applicable exemptions and reliefs. The NRB is the threshold above which IHT is payable. It is currently set at £325,000 and the residence nil rate band (RNRB) is set at £175,000 if certain criteria are met.
However, the implications of making lifetime gifts should be considered, as the value of any gifts made by an individual in the seven years before death will be included in their taxable estate for IHT purposes.
If an individual wishes to make lifetime gifts from their estate, they should consider whether any of the below exemptions apply.
Gifts between spouses and civil partners
Most gifts between spouses and civil partners are exempt from IHT. This exemption can be useful for equalisation of assets between spouses or civil partners. It ensures that both individuals maintain as much of their NRB and RNRB as possible. It should be noted that certain domicile rules apply relating to this exemption.
Gifts to charities
Gifts to UK charities during a lifetime are exempt from IHT, regardless of the amount donated. Additionally, where an individual leaves 10% or more of their net estate to charity, the balance will benefit from a reduced IHT rate of 36%.
Normal expenditure out of income
Gifts made as normal expenditure out of surplus income do not incur a liability to IHT provided the individual intends to make such payments for the foreseeable future, keeps proper records, and can clearly afford to make such payments.
It is important for the individual to record the intention and a complete list of expenditure to assist their executors in claiming this exemption.
The small gifts exemption
Gifts of £250 or less may be made to any number of persons in a tax year. However, if the gifts exceed £250 per person, they will form part of the £3,000 annual exemption instead. If various gifts are made to an individual which collectively exceed £250, none of the gifts will be covered and the exemption will not apply.
Wedding and civil partnership gifts
It is possible to make the following gifts on the occasion of a wedding or civil partnership which will be exempt from IHT:
- Each parent can give £5,000
- Each grandparent (or remoter ancestor) can give £2,500
- Either of the couple can give each other £2,500
- Any other person can give £1,000
The annual exemption
This applies to lifetime gifts which do not fall into any of the other exemptions. The first £3,000 of gifts made by an individual in any one tax year are exempt from IHT. Any unused amount of the annual exemption in one tax year, whether the whole or part, can be carried forward for one tax year only.