COLUMN: Inheritance tax rights

judy payne
judy payne

If you’re feeling generous, how about saving 40 per cent inheritance tax (IHT)? This article takes a brief look at what exemptions are available in respect of gifts of cash made from your assets.

Annual exemption

Everyone can make gifts of up to £3,000 per (tax) year, and not have the gift added to your estate valuation for IHT purposes when you die.

If you did not make a gift in the previous tax year, the exemption for that year can also be used in the current year.

In addition, small gifts of up to £250 per tax year can be made to any one person free of IHT, however, if the sum of annual gifts to that person exceeds £250, the whole gift falls back into charge.

marriage gift

Gifts in consideration of any one marriage or civil partnership by any one transferor are exempt from the IHT.

They include: £5,000 by a parent of one party of the marriage; £2,500 by a grandparent of one party of the marriage; or £1,000 in any other case.

Any excess over and above the amounts listed here may be liable to IHT in the valuation of your estate, should you die within seven years of the date of gift.

Normal expenditure out of income

One of the most useful exemptions is that in respect of gifts from normal expenditure out of income.

In summary, the following conditions must be met:

l The gift was made as part of your normal expenditure,

l When reviewing one year with another, the gift was made from income (i.e. not from capital savings), and

l After allowing for all transfers of value forming part of your normal expenditure, you are left with sufficient income to maintain your usual standard of living.

The potential downside to this very generous exemption is that stringent records must be maintained, which HM Revenue and Customs (HMRC) will ask to see when the estate valuation is eventually submitted upon your death.

It would also be advisable, where possible, to consider splitting the gifts over a number of years, as this will help to establish a pattern of gifts, as opposed to a gift potentially being construed as a ‘one-off’.