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Gifting rules and inheritance tax

Posts Tagged ‘inheritance tax’

Gifting rules and inheritance tax

Wednesday, June 5th, 2019

Following an in depth study conducted by the National Centre for Social Research (NCSR) and the Institute for Fiscal Studies (IFS), it has been discovered that only one in four people making financial gifts are aware of the risks of inheritance tax. Further to this, they found that only 45% of gifters reported being aware of inheritance tax rules and exemptions when they gave their largest gift.

A staggeringly low 8% of respondents considered tax rules before making a financial gift and most did not associate gifting with inheritance tax. When compared with the fact that over half of respondents said that they planned to leave inheritance, it’s obvious that there seems to be a gap in gifter’s knowledge.

For those who were aware of the rules surrounding inheritance tax, 54% said this influenced the value of their largest gift. This was most prevalent amongst affluent taxpayers who had assets of £500,000 or more. Respondents below this threshold had more limited knowledge of the long-term effects of inheritance tax, the seven-year rule or the annual limit on gifts.

So, where does the money go?

80% of gifters gave to individuals, with charities coming in second at around 10%. The most common beneficiaries were adult children, followed by 15% giving to parents or other family members and 14% making gifts to friends. The most popular reasons were presents for birthdays and weddings.

The data also suggested that even when individuals considered inheritance tax rulings, it did not deter them from giving the gift.

The rules

Gifts of £250 or less, totalling below £3,000 per year, are exempt from inheritance tax. Most gifts, in fact, made from one individual to another during their lifetime are exempt, unless the donor dies within seven years of making the gift. These gifts are referred to as potentially exempt transfers (PETs).

The current starting threshold for inheritance tax for a single person is set at £325,000. This amount is then doubled for married couples and civil partners, who also have the additional benefit of the residential nil-rate band, which allows for a further £150,000 of tax-free, property-based inheritance per person. This particular allowance is set to rise to £175,000 as of the 20th of April 2020.

An unsuccessful PET is taxed depending on how long the gifter has lived following the giving of the gift and is referred to as ‘taper relief.’ If a gift is given less than three years before death, the full rate of 40% is applied to the gift, tapering off to 8% if the gift was given between six to seven years before death.

However, this is not the case when it comes to transactions with a reservation of benefit. For example, if you give away your home to your children and continue to occupy it rent-free, the property is still considered as forming part of your estate immediately if the worst were to happen. An individual cannot retain possession of a chattel or property whilst making a PET.

Though it may be difficult to plan for the worst, knowing how to best mitigate the tax surrounding gifts and inheritance can help you make key financial decisions at the most opportune moments, and prevent any avoidable losses when it comes to sharing your assets with the people and organisations that matter most to you.

The £1,000,000 inheritance tax exemption

Wednesday, July 15th, 2015

Mr Osborne has made good his manifesto commitment to ease the burden of inheritance tax, but his approach is not simple. We take a closer look.

One of the surprises in the Conservative manifesto was the proposal to create a new transferable main residence band of £175,000 per person for inheritance tax (IHT). The idea was criticised by many, including the Institute for Fiscal Studies which said “it would have been much simpler and arguably fairer” to just increase the nil rate band to £500,000. In a leaked paper published by The Guardian, even the Treasury, said that “there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences”.

Nevertheless the Chancellor has gone ahead with the plan, but it is rather more complicated than the manifesto suggested:

  • The initial band will be £100,000 in 2017/18, rising by £25,000 a year until it reaches £175,000 in 2020/21. It will then increase in line with CPI from 2021/22 onwards.
  • The band will generally only apply to gifts of main residences (not second homes) to direct descendants.
  • The transferability is only between spouses and civil partners – as applies to the existing nil rate band.
  • A taper will apply to the allowance for estates valued at over £2m: the allowance will drop by £1 for each £2 over this threshold.
  • There will be special provisions for those who downsize or cease to own a home on or after 8 July 2015.
  • The legislation introducing the new band will extend the current IHT nil rate band freeze until the end of 2020/21.

The leaked Treasury paper estimated that the measure would still leave 6% of estates liable to IHT by 2020, so you cannot forget the tax completely. To discuss what impact the measures will have on your long term estate planning and what actions you should consider, please contact us.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.