OK, let's talk gifting allowance for inheritance tax. This is a topic that I see a lot of clients get very confused about, whether it's for their lifetime planning or as executors completing an IHT400 where there have been gifts during the deceased’s lifetime.
There were 4 ways in which gifts can be exempt from IHT:
1. Small gifts allowance: these are gifts of no more than £250 to an individual in a tax year. Multiple gifts in the same year to the same person are amalgamated and if they exceed £250 then the allowance is completely lost (I.e. you cannot simply claim the exemption for the first £250 of the gift)
2. Gifts at special occasions: this allows for larger gifts when someone gets married for instance. The amount of exemption varies depending on the relationship between the person making the gift and the person receiving the gift so it is worth checking in each instance.
3. Regular gifts out of surplus income: by far the most valuable of the gifting allowance but it carries specific requirements and, due to the valuable nature of this exemption, it will be carefully scrutinised by HMRC.
Where this applies a person can make gifts of any amount, without the need to survive the gift by seven years, so long as the gift is made out of surplus income and there is a regular intention to make such gifts. What classes as surplus income is very narrowly construed and cannot include capital assets, such as the proceeds of a house sale, but would include rental income. To calculate if this is indeed surplus all the persons regular living expenses must be taken into account in that tax year and set against their income for that year. This type of gifting is therefore best done at the end of a tax year when the figures can be calculated.
4. Finally, the seven year rule is something in itself that people find confusing. This rule states that any non-exempt gift must be survived by seven years to fall outside of a person's estate for IHT purposes. There is no limit on the level of gift, however as individuals we each have an IHT allowance of £325,000. If a gift is not survived by seven years then it uses up a part, or all, of this allowance. If the gifts exceed £325,000 at the date of death then the amount of the gift over this threshold becomes subject to IHT. It should also be noted that the value of gifts within the seven year window are cumulative and must together be less than £325,000 to be exempt.
There are some complex rules where trusts are involved or where very large gifts have been made so please do seek professional advice if this is the case.
It is possible to use lifetime gifting as an effective form of estate planning. It is however important to ensure that the rules around those gifts are correctly understood, as this can otherwise lead to unforeseen tax consequences.
If you would like to discuss your estate, and the lifetime planning options available to you, or if you are acting as an executor and need help understanding how lifetime gifts will be treated, then please do not hesitate to contact Ashley Minott on 01494 893518 or on firstname.lastname@example.org.