Tax Tip 4: How to reduce the value of your estate for Inheritance Tax purposes through lifetime giving

There are several allowances and exemptions that anyone with an estate valued at more than the available thresholds can consider when trying to reduce the value of their estate for IHT purposes. 
However, it must be said that we always caution clients against gifting too much of their estates away. 
Life can become suddenly expensive and it can be better to pay a little tax than it is to run out of money due to some unforeseen and unexpected liability.

1. Annual Exemption

An individual can gift up to £3,000 each year without IHT consequences.  You can also carry forward any unused exemption from the previous year.

2. Small Gift Exemption

An individual can gift as many small gifts of £250 as they wish throughout the year.  However, all gifts made are cumulative so that if you make more than one gift of £250 to an individual it would eat into the annual exemption.

3. Gifts on Marriage

Parents, friends and other family members can make larger than usual gifts on the marriage of a loved one without any IHT consequences.  Parents can gift up to £5,000, grandparents £2,500 and anyone else can gift up to £1,000.  The gifts on marriage do not use up any of the annual exemption and are immediately discounted from the value of your estate for IHT purposes.

4. Regular Gifts out of Surplus Income

The key to successfully claiming this exemption is meticulous redcord keeping.  Your executors will need to be able to present to HMRC evidence of the recurrence of the gifts.  The amount of time between each gift i.e. per annum or per month, is irrelevant as long as the gifts occurred regularly.

The gifts must also have been made out of excess income.  The gifts cannot be made from your capital.  For example the gift must not have had an impact on your everyday standard of living.

HMRC will require details of your income and expenditure for each year in which a regular gift was made so that they can be sure that there was an adequate amount of income from which to make the gift.

In their guidance, HMRC use birthdays and seasonal gifts as an example of the exemption but in fact the legislation can be interpreted on a much wider basis.

5. Gifts to Exempt Beneficiaries

Any gifts made to a spouse, charity or political party (and a few other more unusual exemptions) will immediately reduce your estate for IHT purposes.
As part of estate planning, we regularly use gifts between spouses in order to balance estates to make the most of available allowances and thresholds.

6. Potentially Exempt Transfers (PETs)

If you make a gift to a non-exempt beneficiary valued at over the annual exemption and you survive the gift by 7 years, the value of the gfit will be disregarded for IHT purposes.

If you die within 7 years of making the gift, your estate is valued for IHT purposes as containing the gift. 

There is so much more to know about PETs and tomorrow’s tax tip is dedicated to them so come back for more information.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.