Understanding Inheritance Tax: Exemptions and Planning

Overview

Welcome to another session of topical tax tips with Bernard Critchley, Tax Manager at Aspen Waite. Today, we focus on inheritance tax (IHT), particularly on the various exemptions available and the importance of proper planning. Annual Exemptions and Gifts

Annual Exemptions and Gifts

One of the key aspects of inheritance tax planning is understanding the exemptions available for gifts:

  1. Annual Gift Exemption:

    • You can give up to £3,000 every year completely exempt from inheritance tax. This exemption allows individuals to reduce the value of their estate over time, thereby potentially lowering the IHT payable.
    • If you didn’t use last year’s exemption, you can carry it over, allowing you to gift up to £6,000 in one year. This carry-forward provision is a great way to maximize your gifting potential if you missed out on the previous year.

  2. Small Gifts:

    • You can give up to £250 to any number of individuals, completely exempt from IHT. This exemption is particularly useful for making small, regular gifts to friends and family without affecting your overall IHT liability.

  3. Gifts on Marriage or Civil Partnership:

    • Parents can give up to £5,000 to a child who is getting married or entering a civil partnership.
    • Grandparents can give up to £2,500.
    • Anyone else can give up to £1,000.
    • These exemptions provide a significant opportunity to pass on wealth at important family milestones.

These exemptions are particularly useful for those planning family events, such as weddings, and can help reduce the overall value of your taxable estate.

Regular Gifts from Surplus Income

If you establish a regular pattern of giving from your surplus income, and this does not affect your usual standard of living, these gifts can also be exempt from IHT. This often-overlooked exemption can be a valuable tool in estate planning:

  • Documentation: It is crucial to keep detailed records of your income, expenditure, and gifts made to demonstrate that these gifts are indeed from surplus income.
  • No Impact on Living Standards: The key requirement is that the gifts should not reduce your standard of living. For example, regular contributions to a grandchild’s education fund could qualify if they are affordable and sustainable.

Potentially Exempt Transfers (PETs)

Larger gifts that don’t immediately benefit from the aforementioned exemptions can be made as Potentially Exempt Transfers. These gifts become fully exempt if the donor survives for seven years after making the gift:

  • Taper Relief: If the donor dies within seven years, the gift may still qualify for taper relief, reducing the IHT payable. The relief reduces the tax owed incrementally over the seven-year period.
  • Planning Strategy: Making PETs can be a strategic way to transfer wealth, especially if the donor is in good health and expects to live beyond seven years.

Exemptions for Business and Agricultural Property

Certain gifts of business or agricultural property may also qualify for exemptions, depending on specific rules:

  • Business Property Relief (BPR): This can provide up to 100% relief on the transfer of business assets, including shares in unlisted companies or a business interest.
  • Agricultural Property Relief (APR): Similar to BPR, APR can offer up to 100% relief on qualifying agricultural property, which includes farmland and buildings used for agricultural purposes.
  • Eligibility: It’s essential to meet specific criteria and maintain the property or business for a certain period before and after the transfer to qualify for these reliefs.

The Importance of Making a Will

Despite an increase in will writing due to the COVID-19 pandemic, it is estimated that two-thirds of UK residents do not have a will. This includes 42% of those over 55 and 21% of those over 65. Having an up-to-date will is crucial for several reasons:

  • Ensuring Wishes Are Met: A will ensures that your assets are distributed according to your wishes, preventing potential disputes among heirs.
  • Avoiding Intestacy: Dying without a will (intestate) can lead to the state deciding how your assets are distributed, which might not align with your intentions.
  • Regular Updates: It’s important to regularly update your will to reflect changes in personal circumstances and family events, such as births, deaths, marriages, and divorces.
  • Guardianship: For those with minor children, a will is the only way to designate guardianship, ensuring that your children are cared for by someone you trust.

Conclusion

Proper inheritance tax planning involves understanding and utilizing the available exemptions, making regular gifts from surplus income, and ensuring you have an up-to-date will. These steps can help minimize the IHT burden on your estate and ensure your assets are distributed according to your wishes.

For personalized advice on inheritance tax planning or any other tax-related matters, feel free to contact Aspen Waite. We are here to help you navigate the complexities of tax laws and ensure you make the most of available exemptions.

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