Where clients are wishing to reduce their potential inheritance tax liability, there are lifetime inheritance tax exemptions and allowances they should be made aware of. For a number of these, they may need to seek regular advice from tax specialists to ensure that they will qualify for an exception or do not exceed an allowance.
Each person has an annual exemption of £3000 per year that can be gifted in any way that will not be considered for inheritance tax purposes. If the full £3000 is not used fully in that year, any unused allowance may be rolled over to the next year once.
Small Gift Exemption
Small gifts of £250 or less are exempt from inheritance tax. A person can make as many of these gifts as they like each tax year as long as the total amount gifted to each individual is less than £250. This could be particularly useful if a person has a large number of grandchildren or nephews and nieces and could therefore gift £250 each to them every year tax free.
If this allowance is exceeded, the whole gift would become taxable, not just the amount which exceeds £250. For example, if person makes a series of gifts to their niece over the course of a tax year amounting to £300, the whole £300 would be taxable if they died within 7 years, not just the £50 that exceeds the allowance.
It should also be noted that the small gift allowance and annual allowance cannot be used in conjunction, it is one or the other. If a person makes gift of £3250 to one person and has not rolled over an unused allowance from the previous year, the £250 would be taxable.
Gifts in Consideration of a Marriage/Civil Partnership
Some gifts made in consideration of a marriage or civil partnership will not be considered for inheritance tax purposes. This will depend on the amount given and relationship between the gift giver and the receiver:
- A parent can give up to £5000 in total inheritance tax free to a child. A child for this purpose can include adopted and stepchildren.
- Either party to the marriage can give up to £2500 to the other.
- Remoter ancestors (e.g. grandparents and great grandparents) can give up to £2500 to a remoter descendant.
- For any other relationship, a person can give up to £1000.
These gifts can be made to either party of the marriage, but not both.
Three further conditions must also be met:
- The gift must be made either on the marriage/civil partnership or slightly before.
- The gift must be conditional on the marriage/civil partnership taking place.
- It is made for the purpose of, or with a view to encouraging or facilitating, the marriage/civil partnership.
Maintenance of Family Members
Reasonable payments towards maintaining children/stepchildren who are minor or still in full time education are exempt for inheritance tax purposes. Similarly, reasonable gifts for the care/maintenance of an elderly relative are exempt. For this purpose, a relative is either a parent or parent-in-law, or a relative or relative-in-law who is unable to care for themselves.
Regular Payments out of Income
In certain circumstances, regular gifts of surplus income, for example into a child’s savings account, could be seen as exempt from inheritance tax.
Gifts to a Spouse or Civil Partner
Any gifts made during a person’s lifetime to their spouse or civil partner are not taxable as part of the giver’s estate.
Gifts to Charities
Any gifts to charities are inheritance tax free if they are made to a UK based charity (the general rule is that it is registered at the Charity Commission) and the gift is both outright (without any conditions or limitations) and immediate (with no one else having an interest between the giver and the charity). Most charitable gifts, those given absolutely and without any conditions, will qualify.
Gifts to Political Parties
Gifts made to qualifying political parties under S24 Inheritance Tax Act 1984 are inheritance tax free. A political party will qualify if at the last general election:
- Two members of that party were elected to the House of Commons; or
- One member was elected to the House of Commons, but members of that party received more than 150,000 votes.
Gifts to qualifying housing associations, to bodies established for national purposes and for maintaining historic buildings are all inheritance tax free under S24A, S25 and S27 Inheritance Tax Act 1984 respectively.