It is always recommended that a full consideration of an individual’s estate for inheritance tax purposes is undertaken. This article provides a high level summary of some simple planning for Inheritance Tax “IHT” purposes that can be undertaken outside of a larger planning exercise.
Tax Effective Planning
There are a number of exemptions from IHT that can be used on an annual basis and these exemptions fall entirely outside of IHT rules regarding gifts and Potentially Exempt Transfers “PETS”. The amounts involved are not material in relation to a taxpayer’s wider estate however it is important to ensure that full use is made of these exemptions where possible.
Each individual can gift up to £3,000 each year either as a single gift or as several gifts adding up to this amount. Any unused allowance from the previous tax year can also be used.
Small gift exemption
Each individual can make small gifts of up to £250 to as many individuals as they desire and this will be IHT free.
Gifts in consideration of Marriage
If a gift is made in consideration of a marriage, to one or both parties to the marriage, then it will be exempt up to £1,000 in respect of any transfer.
Regular gifts out of income
It is possible to gift higher amounts of income if it can be proven that excess income is available for the purposes of making such a gift and that this will not materially affect the normal standard of the donor’s living.
To qualify it is necessary to establish a pattern of regular gifts (i.e. the payment of grandchildren’s nursery or social activities fees) to establish the regular nature of the gift.
If available excess income of £10,000 existed, this can be combined with the other exemptions above and effectively remove a sizeable sum of value from the estate each year. For example, combining a £10,000 gift from regular income and £3,000 exemption, this would potentially save £5,200 in Inheritance tax per year.
It is also possible to establish a trust and pay a maximum amount of £325,000 into the trust (this is the lifetime limit amount for transfers before IHT is due) and establish a regular gift from income into a discretionary trust to increase the value of the trust assets, which will fall outside of an individual’s estate for IHT purposes.
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This article was published in May 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.