What is inheritance tax?

Inheritance Tax (also known as IHT) is a UK tax levied on an individual’s death on the total value of their estate at the date of death (value of property, money, and possessions). The majority of individuals do not pay any IHT due to the total value of their estate not exceeding the £325,000 nil rate band.

If an individual’s estate does exceed the nil rate band, there are many tax planning opportunities to consider during their lifetime to reduce an individual’s exposure to inheritance tax on death.

One of the most common ways to reduce the tax burden on death is by gifting surplus assets to future generations during their lifetime. Normally, gifts between individuals are potentially exempt transfers (PETs) and will only be charged to inheritance tax should the donor die within seven years of the gift.

Are their exemptions available which are not subject to Inheritance Tax?

There are exemptions available which mean that an individual can make certain gifts annually which will not be subject to inheritance tax even if the donor dies within seven years of the gift. Individuals should seek to utilise these each year to reduce their taxable estate without incurring an IHT liability.

Annual exemption

Each individual has an annual exemption of £3,000 per tax year. This means a donor can gift up to £3,000 per year free of inheritance tax. Even though this amount seems small, if it is utilised over a number of tax years, this can be a significant and easy method to decrease the tax burden on death.

Any unused allowance can be carried forward one year after which, if not used, it is lost.

Small gifts exemption

An individual can transfer up to £250 to any person per tax year with no limit to the number of donees.

Marriage exemption

An individual can gift up to £5,000 to their children, £2,500 to grandchildren, and £1,000 to any other person as a wedding gift. Even though this opportunity may not arise frequently, it may be a good method to transfer wealth on this occasion.

Normal expenditure out of income

This is a good way to make gifts as there is no monetary limit on the gift. Under these rules, a transfer is exempt from inheritance tax provided that it is made as part of the normal expenditure of the donor, it is made out of income and leaves the donor with sufficient income to maintain their normal standard of living.

The gift also must be a habitual payment out of income and HMRC must be able to see a clear pattern of this giving. If wishing to take advantage of this relief professional advice should be sought.

Spouse exemption

Any individual can gift to a UK domiciled spouse free of inheritance tax during their lifetime and on death.

Charity exemption

Gifts to registered charities in the UK and European Economic Area are exempt without any limit during lifetime and on death.

How can MHA Moore & Smalley help?

There are also many other tax planning opportunities available to reduce an individual’s exposure to inheritance tax on death.

If you would like us to consider these opportunities for you personally, please contact the tax team to arrange a meeting.