Tax Relief Through Gifting

Inheritance Tax (IHT) has been a subject of intense debate in recent times. As property prices have continued to rise, many more people have found that their estates will fall above the IHT threshold and, as a result, their beneficiaries or dependants will be faced with a significant tax bill. Finding ways to avoid the IHT charge should be a priority for anyone concerned with estate planning. If the value of your estate exceeds the IHT threshold but not by very much, then gifting can be an effective method of reducing a tax bill.

The IHT threshold, known as the Nil-Rate Band, is set at £325,000. This means that estates with a value exceeding this figure will be taxed at a flat rate of 40% on the excess. Clearly, this should be avoided wherever possible for the sake of the beneficiaries of the estate. There are a number of exemptions to IHT; for example, a surviving spouse permanently resident in the UK will inherit assets without attracting a charge. However, it is possible to distribute parts of your estate to individuals who would not otherwise qualify for an exemption, as long as those transfers are made while you are still alive.

Annual and Small Gift Exemptions

The most important exemption of this kind is known as the annual exemption. This allows individuals to gift away up to £3,000 in any single tax year without attracting an IHT charge. These gifts can be made to anyone, and your annual exemption can be carried forward for one year; that is, if you don't use your annual exemption this year, you could gift away up to £6,000 next year without attracting a charge. However, you can only carry this exemption forward for a single year.

Also potentially useful is the 'small gifts exemption'. This allows for an unlimited number of gifts under the value of £250 to be made without risk of IHT being levied. Again, there are a number of qualifications to this scheme. It is not possible, for example, to claim a small gift exemption on a portion of a sum larger than £250; you could not give away £300 in a single gift, for example, and claim the first £250 tax-free. Furthermore, it is not possible to use the annual exemption and the small gifts exemption in conjunction. A gift of £3,250 would not, therefore, be tax-free.

Potentially Exempt Transfers

If you wish to make gifts larger than the small gifts or annual exemption, it may still be possible to avoid the IHT charge. Gifts made to individuals, or trusts for people with disabilities or bereaved minors, may qualify as 'potentially exempt transfers' or PETs. The rules governing PETs mean that gifts made outright (that is, without condition or contingency) will not attract an IHT charge as long as the gifting individual survives the transfer by seven years. Clearly this is a risky estate planning tool, as it is impossible to know for certain whether or not the individual will live for a further seven years. However, for individuals who are in relatively sound health and wish to reduce the size of their estate, PETs and other gifts are an important option.