Inheritance Tax and Gifts

Inheritance Tax and Gifts | Reducing Your Estate's Value

Reducing the value of your estate through strategic gifting is a cornerstone of effective inheritance tax (IHT) planning. By understanding and utilising Potentially Exempt Transfers (PETs), Chargeable Lifetime Transfers (CLTs), and other gifting strategies, you can significantly mitigate the IHT burden on your estate, ensuring that more of your wealth is passed on to your loved ones. Let's take a closer look at the mechanisms of Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs), understand their tax consequences, examine the importance of gifts in estate planning regarding Inheritance Tax (IHT), and explore the implications of inheritance tax on gifts.

Potentially Exempt Transfers (PETs)

Definition and Operation:

PETs are gifts made during your lifetime to individuals (not to a trust or company) that could potentially be exempt from IHT if you survive for seven years after making the gift. Common examples include giving a cash sum to a child or transferring ownership of a property to a family member.

Tax Implications:

• If you survive for seven years after making the gift, it is completely exempt from IHT, no matter its value.
• If you pass away within seven years, the gift is included in your estate for IHT purposes. The tax on the gift is subject to taper relief, which reduces the IHT rate on a sliding scale depending on how long you survive after making the gift. The rates decrease from 40% if you die within three years of making the gift, down to 8% if you die between six and seven years after the gift.

Chargeable Lifetime Transfers (CLTs)

Definition and Operation:

CLTs are gifts made during your lifetime that immediately incur IHT because they are made to certain trusts or companies. Unlike PETs, CLTs can trigger an immediate IHT charge if the combined value of the gift and any other CLTs made in the previous seven years exceeds the nil-rate band (£325,000 as of the last update).

Tax Implications:

• CLTs up to the nil-rate band are not immediately taxable but reduce the available nil-rate band for seven years, potentially affecting IHT on later gifts or on your estate at death.
• For CLTs above the nil-rate band, IHT is charged at a lifetime rate of 20%. If the donor dies within seven years, and the total value of the CLTs and the estate exceeds the nil-rate band at that time, an additional 20% may be due.

IHT Gifting Allowances | Inheritance Tax Gift Allowances | IHT Exempt Gifts

Annual Exemption: Each individual has an annual gifting allowance of £3,000 that does not count towards the estate for IHT purposes. This allowance can be carried forward one year if not fully used.

Small Gifts: You can give as many gifts of up to £250 per person per year as you like without them being added to your estate for IHT purposes, provided you haven’t used another exemption on the same person.

Wedding Gifts: Gifts in consideration of a wedding or civil partnership can be exempt up to certain amounts, depending on your relationship to the recipient (e.g., £5,000 for a child, £2,500 for a grandchild).

IHT Gifts out of Income (gifts out of normal expenditure): Regular gifts made from your income (not your capital) that do not affect your standard of living can be exempt from IHT. This requires careful documentation to prove that these gifts are indeed from income and are part of a regular pattern.

Gifts to Spouses and Charities: Inheritance gifts to your UK-domiciled spouse or civil partner are exempt from IHT, as are gifts to registered charities. These can be made at any time and are not subject to the seven-year rule.

Note: This page is for information purposes only and should not be considered as financial advice. Always consult an Independent Financial Adviser for personalised financial advice tailored to your individual circumstances.