Gifts and annual exemptions

You may be liable on death to pay Inheritance Tax (‘IHT’) upon gifts given either during lifetime or upon death. Upon death, the first £325,000 of such gifts is referred to as the Nil Rate Band (‘NRB’) and passes free of IHT. The balance is taxed at 36% or 40% depending on your Will. The tax free sum can be increased:-

  • by £175,000 if a residence passes directly on death to a direct descendant
  • to a total of £1,000,000 by transferring any unused NRB from your spouse/civil partner who dies before you.

Certain lifetime gifts will not be taken into account. These include:-

  • Gifts to a UK domiciled spouse;
  • Gifts to charities, political parties, and bodies which provide a public benefit (e.g. museums);
  • Gifts up to £250 per beneficiary per year;
  • Gifts up to £5,000 to children, or £2,500 to grandchildren, getting married;
  • Gifts out of income (special rules apply to such gifts).

There is also the IHT annual exemption of £3,000 which can be gifted in a tax year by an individual. This does not need to be a single gift, however if the total of the gifts exceeds the annual exemption then the amount in excess could be liable to IHT. You can also utilise any unused annual exemption from a previous tax year.

Other lifetime gifts are Potentially Exempt Transfers. If you live for seven years after making such gifts there will be no IHT consequences. If you live less than this, there will be IHT consequences. Depending on the value of the gifts, a reduced tax rate may apply. If you retain a benefit from that gift, different rules apply.

There are reliefs which relate to:

  • Business property (e.g. shares in private trading companies, and other business assets)
  • Agricultural property (only on the agricultural value of the property, not its value for other purposes)

These can qualify for relief at either 100% or 50%, provided certain criteria are met.

The above gives some information relating to gifting. The rules are different if you make gifts into trust.

The above gives some illustrations as to what may be possible. If any further details are required, please contact a member of our Private Client team.

This article provides only a general summary and is not intended to be comprehensive.  Special legal advice should be taken in any individual situation.


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