As the inheritance tax (IHT) nil rate bands have remained frozen for 16 years, more individuals are choosing to make lifetime gifts to reduce their future IHT liability. However, it’s important to understand which exemptions apply before making any lifetime gifts.
Gifts, regardless of their size, are exempt from IHT if the donor then lives for seven years. However, it is always prudent – especially for older donors – to make use of available exemptions.
The most useful exemptions are those for gifts to a spouse or a civil partner, the annual exemption and gifts from income.
Spouse or civil partner
Although a gift to a spouse or civil partner is exempt from IHT, such a gift will not reduce the value of a couple’s combined estate. However, if one spouse or civil partner is younger or in better health than the other, it makes sense for that individual to have sufficient funds so they can then make family gifts.
Annual exemption
The exemption is only £3,000 a year, although any unused amount can be carried forward to the following year; with the current year’s exemption used before any brought forward amount. A couple could use this exemption to invest £6,000 a year into a Junior Individual Savings Account (JISA) for a grandchild.
Gifts from income
Probably the most useful of the exemptions is gifts from income, given that the amount of gift is, in theory, unlimited each year. It’s also the most complicated, with three conditions to be met:
- The gift must be made out of income, not capital (income is after paying income tax, with HMRC arguing that income becomes capital two years after it is received);
- The gift must be part of the donor’s normal expenditure (this means the expenditure has to be habitual or regular); and
- The donor is left with sufficient income to maintain their usual standard of living (so, it is essentially just surplus income that qualifies).
This exemption is ideal for paying school fees for grandchildren. However, it would be of no use where a parent or grandparent helps with a house deposit, because such a gift would not be habitual or regular.
For more information, contact us on 01142 664 432 or email info@smh.group.
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