PLANNING FOR THE FUTURE
INHERITANCE TAX & LIFETIME GIFTS
BACKGROUND INFORMATION
1. Inheritance tax is charged on your estate after you have died. Your estate comprises
the value of your home, any other property, shares and investments and cash and your
personal belongings, for example, jewellery, motor car, book or stamp collections.
2. If your estate is worth more than the Inheritance Tax threshold (known as the nil rate
band) Inheritance Tax (IHT) is charged at the balance over the threshold.
threshold is £325,000.00 which is frozen until April 2018.
The
The rate of IHT is 40% on
the balance over the threshold.
For example,
David’s estate is £600,000.00; the threshold of £325,000 is deducted leaving a balance
of £275,000.00, which is charged to IHT @ 40%, which yields £110,000.00 IHT.
LIFETIME GIFTS
1. The IHT charged may be affected by the incidence of lifetime gifts.
2. Exempt donees-
You are able to make gifts to certain people and organisations without having to pay
any IHT. The gifts are exempt if you make them during your lifetime or in your Will.
The exempt gifts are made to:

Your lawful husband, wife or civil partner provided he or she has a permanent
home in the UK.

A qualifying charity established in the EU, including a church.

Some National Institutions, e.g. Museums, Universities and the National Trust.
1

Any UK Political Party that has at least two Members elected to the House of
Commons or has one elected Member but the Party received at least
150,000.00 votes.
3. Any gifts to your unmarried partner or unregistered civil partner are not exempt.
4. Annual exemption-
You are able to make gifts worth up to £3,000.00 in total in each tax year which are
exempt from IHT upon death.
The tax year runs from 6 th April to 5th April the following
year.
You are able to carry forward any unused part of the £3,000.00 exemption to the following
year, but if it not used in that year, the carried-over exemption expires.
5. Exempt gifts-
These are made in addition to the £3,000.00 exempt gift.
(a)
Wedding gifts/civil partnership ceremony gifts:

Parents may give cash or gifts worth up to £5,000.00.

Grandparents and great-grandparents can each give cash or gifts worth
£2,500.00.

Any other person may make cash or gifts worth up to £1,000.00.
You must make the gift (or promise to make it) on or shortly before the date of the
wedding or civil partnership ceremony. If the ceremony is called off and you still make
the gift or if you make the gift after the ceremony without having promised first, the
exemption will not apply.
2
(b) Small gifts-
You are able to make small gifts up to the value of £250.00 to an
unlimited
of individuals in any one-tax year if you give an amount greater than
number
£250.00,
the exemption is lost all together.
(c) Regular gifts or payments that are part of your normal expenditure-
This is a useful exemption which must be claimed by your executors upon death. It is
essential for you to keep proper records of the gifts to enable your executors to claim
successfully that the exemption applies.
The gifts must comprise normal expenditure
out of net income (i.e. the tax has been paid) and the gifts will only qualify if you have
enough income left to maintain your normal lifestyle.
There must be a settled intention to make regular gifts for example, you should write a
letter to make the commitment or establish a pattern e.g. the payment of annual
premiums on a life policy for the benefit of someone else or written in trust for the
beneficiary.
You are able to stop making the gifts if your circumstances change, for example, if you
need more income to pay for care.
The exemption is established as soon as the payments are made and this means that
if you stop making the gifts you do not lose the exempt status of those you have
already made.
Income will include salary, rent received, dividend income from shares, and interest
paid on a bank or building society account. Note that it is net income after tax has
been paid.
The gifts are made by an individual and not pooled as a couple.
3
The exemption may be combined with other exemptions.
The executors would need to claim the exemption by completing form IHT403.
It is
useful to obtain this form (link:www.hmrc.gov.uk/inheritancetax/iht403.pdf) and to
provide the details of the gifts on an ongoing basis. This will enable your executors
to claim it after you have died. If you do not keep proper records, your executors will
not be able to establish this exemption.
6. Maintenance payments- Exempt maintenance payments may be made to:

Your ex-husband, ex-wife or former civil partner.

Relatives who are dependant on you because of old age or infirmity.

Your children, including adopted children and stepchildren, who are under 18 or
in fulltime education. Note that fulltime education may continue to an age well
beyond 18.
7. The seven-year rule- “potentially exempt transfers”- Many people seem to be
aware of a seven-year rule but do not have any details regarding the nature of this rule,
there are many widespread misunderstandings regarding this rule.
You are able to make gifts to individuals, which will be exempt from IHT provided that
you outlive the gift for seven years and this type of gift is known as a Potentially
Exempt Transfer (PET).
If you die within seven years and the total of the gifts you have made is less than the
IHT threshold (£325,000.00), the value of the gift is added to the estate and any IHT
due is paid out of the estate.
If you die within seven years of making the gift and the gift is more than the IHT
threshold (£325,000.00), IHT is paid on the value of the gift, either by the donee or by
the personal representative of the estate.
4
If you die between three and seven years after making the gift and the total value of
the gift paid is over the IHT threshold, taper relief will apply to reduce the impact of the
gift.
The following shows how taper relief may work:
Time made between the date of the gift to the date of death
Taper relief percentage applied
3 to 4 years
20%
4 to 5 years
40%
5 to 6 years
60%
6 to 7 years
80%
Full records of the date, recipient and size of the gift must be kept to enable your executors to
complete the IHT forms and make a full disclosure to the Revenue.
8.
Gift with reservation of benefit- If you purport to give an asset away at any time but
retain an interest in it, the gift will not be a potentially exempt transfer and the full value
will be part of your estate for IHT purposes.
For example,
Ben is a widower and transfers the legal title to his home to your children but
continues to live in it rent free. This a gift with reservation benefit and is not an
effective gift to reduce the IHT paid on your death.
Gifts into trusts are not generally exempt from Inheritance Tax.
9. Note the importance of keeping records-
It is essential to keep proper records to enable your executors to claim the proper
exemptions. Remember that your executors will be making the claims after you have died
and you are unable to clarify matters or provide further information.
5
These are complex matters and this statement is provided for general guidance.
We will be pleased to provide further advice and guidance to meet your circumstances.
Contact details for Wills & Probate Department:-
Naomi Pinder
Solicitor - Head of Department
John Bradfield-Kay
Solicitor
 [email protected]
 [email protected]
Bianca Moran
Personal Assistant to Naomi Pinder
 [email protected]
6