Chartered Legal Executive, Adele McCabe, outlines the inheritance tax exemptions that could be of use to you if you are looking to start lifetime Inheritance Tax planning.
What is Inheritance Tax?
Inheritance tax is a tax on your estate when you die. Your ‘estate’ is everything that belongs to you, including your home, belongings, savings, investments, etc. If your estate it taxable, that tax must be paid before anyone can inherit.
Inheritance tax may seem complicated, but there are several exemptions that can make a real difference. Understanding what is available to you is often the first step towards sensible lifetime planning.
What are the Inheritance Tax Exemptions?
If you leave your whole estate to your husband/wife/civil partner, your estate will be exempt from paying inheritance tax. The same applies if you leave your whole estate to charity. Any gifts you leave in your Will to your spouse/charity will be inheritance tax exempt.
Spouse/Civil Partner exemption
Everyone has a tax-free allowance of £325,000. This is known as the nil rate band.
There is no inheritance tax between married couples/civil partners, and the government allows you to carry over any unused allowance until the death of a second spouse/civil partner. This means married couples and civil partners are entitled to a combined allowance of £650,000.
In April 2017, the government brought into force the Residence Nil Rate Band. This exemption applies if your home is left to a direct descendant, such as your children or grandchildren. Your Executor may claim this additional allowance, which is currently £175,000 per person.
This can provide a total inheritance tax exemption of one million pounds before inheritance tax is payable.
If your estate is worth over £2 million, this exemption will begin to taper.
Annual exemption
Each year, an individual can gift up to £3,000 completely free of inheritance tax: Married couples and civil partners can therefore give combined gifts totalling £6,000 in one year. If this exemption is unused in any one tax year, it can be carried forward for one year only, which means you could give up to £6,000 individually, or £12,000 as a couple in a single year.
It is worth noting that this is a lifetime exemption. If it is not used during the tax year, it is lost.
Normal expenditure out of income
Regular gifts made from income are exempt from inheritance tax, so long as this leaves the donor (the person who makes the gift) with sufficient income to maintain their normal standard of living. There is no financial limit on this exemption, so HM Revenue & Customs is very keen to ensure that it is not abused. A good test is checking if the money comes from a current account. Ultimately, it’s important to practice keeping a record to show that the payments made are regular.
- This exemption will not be available if the income is being gifted and the donor is living off their savings or capital.
Small gifts exemption
Gifts of up to £250 to any one person in any one year are free of inheritance tax. This exemption cannot be combined with a larger gift to the recipient (i.e. the person who received the gift). In other words, if they have already received part of/all of the £3,000 annual exemption or a marriage gift, they cannot then receive a small gift. This exemption is useful for a grandparent who wishes to make smaller gifts to a number of children.
For example, gifts of £250 to each of 8 grandchildren will enable £2,000 to be transferred free of inheritance tax; this can be repeated every year.
Gifts in consideration of marriage
Gifts made in consideration of a marriage, which are given before or at the date of a marriage, are exempt up to various limits. These depend upon the relationship of the donor to the parties of the marriage as follows:
- Parents £5,000
- Grandparents £2,500
- Others £1,000
Gifts for the maintenance of your family
Gifts made to support family members can also be exempt, particularly when the gift is used for the care or maintenance of a ‘dependent relative’. A dependent relative is any relative or spouse/civil partner of the donor who is incapacitated by old age or infirmity from maintaining him/herself and includes a mother or mother-in-law, whether or not incapacitated.
Gifts to charities
Unconditional gifts to charities either during lifetime or on death are exempt.
If more than 10% of the estate is left to a charity on death, then the rate of Inheritance Tax payable on what is left of the estate is reduced to 36%.
Need help with Inheritance Tax exemptions and Lifetime Planning?
Our private client solicitors can help you think through your plans and their financial impact when we write your will. As part of our will-writing service, we will advise on the inheritance tax implications on your estate and how best to minimise it for your loved ones. To learn more about our wills and probate services or to book an appointment, call the team on 020 8771 5254 or fill in the contact form below.
