Tax-free Gifting – Potentially Exempt Transfers
Technically, all gifts given while you are alive fall under the category of Potentially Exempt Transfers (PETs). However, planning and forethought are essential.
Large assets, such as real estate or valuable heirlooms, can be gifted as long as you make the gift in plenty of time. If you die within seven years of making the gift, it will be considered as part of your estate for Inheritance Tax purposes and as such will be subject to tax from the point at which it causes your estate to exceed the applicable Nil Rate Band. The Nil Rate Band for 2018/19 is £325,000, in addition to a £125,000 allowance for a main residence.
- If you make a gift to a Trust, you would still need to survive for seven years for it to fall outside your estate for IHT purposes. Such a gift is called a Chargeable Lifetime Transfer and there is an immediate tax charge of 20% on the excess above your Nil Rate Band.
- If you make a gift but continue to retain a benefit from that gift then it is called a Gift with Reservation of Benefit and only falls outside of your estate once you have given up the benefit and then survived for seven years.
- If you gift your home to your child but continue to live in it without paying a suitable market-value rent, the beneficiary could still be liable for the full amount of IHT above the Nil-Rate Band (currently 40%) based on the value of the property as at the date of your death and not at the date of the gift..
PET and Taper Relief
If you die within seven years of making a PET, it is still possible that Inheritance Tax will be reduced in line with something known as ‘taper relief’, whereby the amount of IHT levied will be reduced depending on how long you survived the PET.
Taper Relief works in the following way:
- If you die 3 to 4 years after the PET, 80% of the full tax rate will be levied.
- If you die 4 to 5 years after the PET, 60% of the full tax rate will be levied.
- If you die 5 to 6 years after the PET, 40% of the full tax rate will be levied.
- If you die 6 to 7 years after the PET, 20% of the full tax rate will be levied.
Taper relief applies to the aggregate value of gifts worth in excess of the £325,000 IHT allowance.
It is possible to pass on gifts of money for IHT purposes during your lifetime and the New Year may be the perfect time to do this. You can give away a total of £3,000 in cash gifts in any one tax year. Plus, if you didn’t give away your total allowance last year, you can add the remaining amount to this year’s allowance and couples can combine their allowance – so feasibly, if you’ve made no other gifts in two years, you and your spouse could give away £12,000 tax-free.
- You can make as many gifts of less than £250 to as many people as you like, provided they are not the same people as have received gifts included within your annual exemption of £3,000.
- You may also be able to make regular gifts out of surplus income – but only if you can prove it does not impact your day-to-day living or come from capital. Your executors will be put to strict proof by HMRC, so we advise that you talk to us if you are contemplating setting up a regular savings account for a child or grandchild for example.
Cash Gifts for Special Occasions
There are other allowable exemptions. For example, you can give wedding or civil ceremony gifts of up to £1,000 a time for non-relatives, up to £2,500 for individual grandchildren or great-grandchildren and up to £5,000 for a child.
Lastly, there is one notable exception: cash gifts you make to your spouse, civil partner or chosen charities are exempt from Inheritance Tax. And gifting at least 10% of the ‘net value’ of your estate to charity could possibly save thousands of pounds in IHT as a reduction will be applied to the rate of IHT applied – currently it will fall from 40% to 36%.
The rules surrounding gifts and PETs in relation to IHT are complex, and in recent years HMRC has become much stricter in investigating and enforcing them. So, the more thorough your planning, the better your chances of a favourable outcome.
If you decide that gifting your wealth and assets during your lifetime is something you want to do, one thing is very important – keep a record of each gift (what you gave and its value), the recipient and the date. This way, your executors will be able to administer your estate more easily, especially when it comes to working out the Inheritance Tax liabilities and whether a gift is a gift or a loan. To make this crystal clear we advise that Deeds of Gift are drafted for substantial gifts.
What Wellers Can Do For You
Wellers specialises in IHT Planning and can give you practical and user-friendly advice to help you achieve your goals and to pass on your wealth in line with your wishes. The sooner you act, the greater your chances of ensuring a favourable situation. Contact us today for more information about how you may be able to give the most important Christmas gift of your life.
Please call 01732 457575 to talk to the Private Client team in Sevenoaks, 01483 284567 for Surrey or call 020 8464 4242 for our Bromley office. You can also email firstname.lastname@example.org.