When considering any type of tax planning and in particular Inheritance planning it is important to ensure that you do not give too much away too quickly. You have worked hard to accumulate your savings and assets. When looking at gifts, ensuring that you have enough funds to maintain your lifestyle is the number one priority.
You may also wish to consider your future needs including care home costs or going on that once in a lifetime holiday that you have always dreamed of.
However, if you do want to make plans to minimise the impact of inheritance tax on your estate the main factor is not complexity but thinking far enough in advance to allow time to use the exemptions and reliefs available and to establish a pattern of gifting, and to take into consideration the seven year survival period for gifts.
Potentially Exempt Transfer (PET)
A potentially exempt transfer is a gift that becomes chargeable to IHT by reason of the donor’s death with seven years of the date of gift. In effect, there is a wait and see approach. The value of the PET is always calculated on the loss to the estate which may not necessarily be the same as the market value of the asset given.
Annual exemption (Currently £3,000)
As the name suggests this is an annual lifetime exemption made available to each donor. It is applied in a strict time order against the first gift of the year, irrespective of whether that is a PET. There is provision to carry forward unused annual exemption for one year only; however the current year annual exemption must always be used in priority.
As a general rule it is better to make a chargeable transfer earlier in the year than a PET, to use the annual exemption to best effect. The timing of gifts is, however, subject to many considerations and the use of the annual exemption is only one of them.
Normal expenditure out of income
This relief affords exemption to regular transfers of value if, taking one year with another, it can be shown that the transfers were:
- Made out of income; and
- After the gift, the transferor had sufficient net income to maintain their usual standard of living; and
- The transfers carry the hallmark of regularity.
If this can be shown there is no need to wait seven years for those gifts to fall out of cumulation. The relief is instant and complete.
These gifts have been tested in the courts extensively and good records are very important as well as seeking professional advice.
Small Gifts
This exemption is £250 per donee per tax year. It cannot be used in conjunction with the £3,000 exemption but there is no limit to the number of individual donees who can benefit.
Gifts in consideration of marriage
These are gifts made strictly “in consideration of marriage” so the gift must be made on or before but never after the event.
The limits are dependent on the relationship the donor bears to the done thus
- £1,000 form any person
- £2,500 from a grandparent or more remote ancestor
- £5,000 from a parent of either party to the marriage.
Registered Legal Partner exemption
A transfer of value is generally exempt between registered legal partners.
If you would like to discuss the ways in which you can include regular gifts in your planning or if you would like to hear further about the Inheritance tax planning services that we offer please contact angela.evans@moorestephens.com.