Inheritance Tax – allowances and reliefs

In this second part of a three part series we will consider the main allowances and reliefs which can be used to reduce your liability to Inheritance Tax.

Nil Rate Band

This is the main relief which most people enjoy. The Nil Rate Band currently stands at £325,000  - on the first £325,000 of your net taxable estate IHT is payable at 0% – hence the name “Nil Rate Band”.

In the previous article we discussed that recent changes in legislation entitled a married couple to pass on any proportion of unused Nil Rate Band to the surviving spouse on first death.

(Please note - the Nil Rate Band has been updated for the 2009/2010 tax year which commenced on 6th April 2009 – Simon)

Inter-Spousal Exemption

Under this exemption, all transfers between spouses and civil partners, as long as they have a permanent home in the UK, are exempt from Inheritance Tax.

The exception to this rule is when a UK domiciled individual is married to a non-UK domiciled individual – in this case, any transfer from the UK domicile to the non-UK domicile receives IHT relief on the first £55,000 transferred only.

Exempt Gifts

Certain gifts are exempt from IHT, regardless of whether they are made during the donor’s lifetime or as a result of a gift through their Will on death: -

• Gifts between husband, wife and civil partners
• UK Charities – here is a list
• Some national institutions such as museums, universities or into the National Trust
• UK political parties

Annual Exemption

Any individual can make a gift of up to £3,000 in any tax year which is free from Inheritance Tax. Any unused relief can be carried forward for just one tax year.

Other Gifts

Some gifts made during lifetime are exempt from Inheritance Tax and they are detailed below:-

Gifts on marriage or entering a Civil Partnership

• Parents can each give £5,000 cash or gifts
• Grandparents and other relatives can give cash or gifts up to £2,500
• Anyone else can give cash or gifts up to £1,000

Small Gifts Exemption

Any individual can make a gift during lifetime to any other individual up to £250 and not be liable to Inheritance Tax.

Gifts out of Normal Expenditure

Any regular gifts made out of net income (i.e. after tax has been paid) are free from Inheritance Tax. These can include regular gifts to someone – e.g. christmas presents, premiums on a life insurance policy or other regular or monthly payments to another person.

In order for this relief to work, the gift must be made out of normal expenditure and not be so high as to affect the donor’s standard of living in that they have to access their own capital to make good any shortfall in maintaining their standard of living.

Potentially Exempt Transfer – the Seven Year rule

Any gifts made to individuals will be exempt as long as there is a period of seven years between the date of the gift and the date of death.

If you die within seven years, and the value of the gifts exceeds the nil rate band, then IHT may be due on the gift. It would be the recipient’s responsibility to pay the IHT due on this gift.

If the value of the gifts is in excess of the Nil Rate band then “taper relief” may apply. HMRC give more information on taper relief here.

Gifts for Maintenance of the Family

Any lifetime gift for the maintenance of the spouse, child or a dependent relative may be exempt from tax as long as the gift is used for maintenance, education or training up to the age of 18, or to the end of full-time education if this is at a later date.

Other Reliefs – to be covered later

Other reliefs are available in respect of businesses, woodland, heritage and farmland - these reliefs will be covered in more depth at a later date.

Note

As with any issue relating to taxation, rules can and do change on a regular basis. Please ensure you take advice from a suitably qualified accountant or solicitor in respect of Inheritance Tax and the allowances and reliefs your own personal estate may enjoy.