The treatment of a lifetime gift for inheritance tax purposes varies depending on the nature of the gift and the allowances available. This note seeks to summarise the main points.

There are two types of lifetime gift for inheritance tax purposes (“IHT”):

• “potentially exempt transfers” commonly known as “PETs” (i.e. outright gifts to individuals); and
• “chargeable transfers” (i.e. gifts into trust)

All PETs are free of IHT if the donor survives it by 7 years. If the donor dies within 3 years then the PET becomes a chargeable transfer and the gift is brought back into the donor’s estate and taxed at the death rates (40% on the excess over the nil rate band, currently £300,000). If the donor survives it by 3 years then a reduced amount of tax is payable, tapering to nil after 7 years.

All chargeable transfers are immediately subject to IHT at the lifetime rate of 20% on the excess over the nil rate band. If the donor dies within 3 years then IHT at the death rate of 40% is payable, and if the donor survives 3 years but dies within 5 years, then a further amount of tax is payable.

The interplay between PETs, PETs that have become chargeable and chargeable transfers is extremely complicated and the order in which gifts are made can have significant future IHT consequences.

There are a number of allowances and exemptions which can be set against gifts.

1. Spouse/Civil Partnership Exemption

All transfers between UK domiciled spouses are free from IHT. Gifts from a UK domiciled spouse to a non-UK domiciled spouse are subject to IHT but have a small extra exemption. The spouse exemption is not available on a gift into a trust for a spouse.

2. Business and Agricultural Property Relief

Qualifying business assets are either entirely free of IHT or eligible for relief of 50%.

Similarly, qualifying agricultural property (which can also include the farmhouse) will also be exempt from IHT or eligible for 50% relief. There is often some overlap between business property relief and agricultural property relief.

The rules as to what business or agricultural property qualifies for relief can be highly technical and it is crucial to obtain advice before proceeding with any proposed gift.

3. Annual Exemption

All taxpayers have an annual exemption of £3,000. Unused allowances can be carried forward from the last tax year only. All individuals have this allowance, so couples may “double up”, each using their own allowance.

4. Regular Expenditure from Surplus Income

IHT is a tax on gifts of capital, not gifts out of income. To claim this allowance it is necessary to show that gifts have been made on a regular basis (e.g. annually) from income not required for day-to-day living expenses. It is important to keep appropriate records enabling this to be shown.

5. Small Gift Allowance

£250 can be given to any individual in each tax year. This allowance cannot be used to benefit the same person who has received the annual exemption.

6. Maintenance for Family

Payments made to close family members who are financially dependent are generally not considered gifts if these payments are for the maintenance of that dependant family member.

7. Marriage

In addition to the above allowances, there are special allowances for gifts on marriage; each parent may give up to £5,000, grandparents may give up to £2,500 and any other person may give up to £1,000

This information sheet is of a general nature and cannot be substituted for professional advice. If you would like further information or to discuss IHT planning in general, please speak to one of the Private Client team or your usual contact at the firm.