Tax exemption & reliefs
Gifts between civil partners or husband and wife
Some gifts or transfers of assets are free from Inheritance Tax whenever they occur. One of the most common and genuine gifts are between civil partners or husband and wife, which are always exempt from tax whether they are made before or after death.
The Nil Rate Band
This is one of the most useful planning tools. Careful planning can help to move assets up to the value of the Nil Rate Band out of the estate in the event of the first death, which will then help to minimise the tax payable in the event of the second death. There are various ways of doing this, some can be complex if the surviving partner has a requirement for on-going income and in some cases it can be as simple as re-writing a Will.
Transfer of unused Nil Rate Band
Where a spouse or civil partner dies and has not used their nil rate, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after 9 October 2007. In effect, spouses and civil partners between them now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.
For example, if on the death of the first spouse, they leave legacies of £40,000 to each of three children, the sum of £120,000 would be chargeable to IHT. Because this is below £325,000, the legacies pass free of tax and £205,000 (or 63.07%) of the nil rate band is unused. This unused amount can be transferred to the estate of the survivor. If the nil rate band when the survivor dies is £350,000 the Inheritance Tax nil rate band for the surviving spouse would be increased by 63.07% to £570,770.
Making gifts during your lifetime- Everyone is entitled to give away up to £3,000 p.a. each entirely free from Inheritance Tax. This entitlement can be carried forward to the next year, if it is not used in full in any one year.
- You can also make any number of gifts up to £250 free of tax; however, you can’t give more than £3,000 worth of tax-exempt gifts to the same person in one year.
- Regular gifts from normal income that don’t reduce your standard of living are also exempt from tax. There is no maximum limit on this exemption, but you must make them from your income and not draw out your capital from savings or investments.
- Parents can give up to £5,000 to their children when they get married and grandparents can give up to £2,500. Even well-wishers can give up to £1,000 free of Inheritance Tax.
You can make a gift of any amount to a Registered Charity or national institutions and it will be exempt from tax. Gifts to universities, museums and recognised political parties are also exempt.
Are there any transfers made after death that are always exempt?
Yes. Payments from company or occupational pension schemes are exempt from Inheritance Tax where the trustees have discretion over who benefits. Similarly, death benefits from personal pensions and other life assurance policies can be ‘written in trust’ to exclude them from the policyholder’s estate on death for the purposes of calculating Inheritance Tax.
Can I make an outright gift before I die to avoid tax?
Yes you can, but you still have to be careful. If you make a gift during your lifetime, they are called ‘Potentially Exempt Transfers’. This means they might be exempt from tax, but only if you survive for seven years after the gift takes place. Otherwise they may be added back in to the estate value. There is a sliding scale of reduction in tax for these gifts where the person making the gift (donor) dies within the seven year period and this is called ‘tapering relief’. Effectively the tax liability for these gifts reduces for each year following the date of the gift so that if the donor survives the full seven years, no tax is due on the value of the gift.
Tapering Relief
- Years since making the gift when death occurs
- 0 - 3 Years
- 3 - 4 Years
- 4 - 5 Years
- 5 - 6 Years
- 6 - 7 Years
- More than 7 Years
- Reduction in tax
(percentage) - nil
- 20%
- 40%
- 60%
- 80%
- No tax
This relief applies to gifts where the total value of the estate exceeds the lifetime Nil Rate Band when the gifts are added back into the estate on death.
