Inheritance Tax (IHT) has rules and exemptions which are worth getting familiar with; this article should help make things clearer to understand.
As an individual, you have the entitlement to gift up to £3000 during the tax year without incurring an IHT charge. This can be split into multiple gifts or a one-off gift. Should you not choose to use your annual exemption, you may carry it over to the following tax year only.
Who is exempt?
- Spouses or civil partners and on death, a spouse is able to pass on their un-used nil rate band which is currently £325,000.00
- Gifts to children for marriage up to £5000.00
- Wedding gifts to grandchildren or great grandchildren up to £2500.00
- Wedding gift to a friend or relative up to £1000.00
- Gift to a charity as long as the gift becomes property of the charity
- Gift to political parties
- Gift to a family member such as transfer of property as a result of divorce
- Gifts given to children under 18 or in full-time education if over 18
- Gifts towards a dependent’s living cost
Lifetime gifts are another option and the following are IHT exempt:
- A transfer to an active company or trust
- Ignored gifts when they are made and on the death of the donor (such as a gift to charity) ie the gift has not been accepted by the charity
- Should a transfer or gift not fall into the above two categories it is known as potentially exempt transfers (PETs), IHT would be due if the donor dies within seven years of making the gift. The amount is determined by the amount of time that has lapsed between the gift and the donor’s death.
Current rates for PETs are 32% for three to four years, 24% for four to five years, 16% for five to six years and 8% between six and seven years.
The death tax rate is 40% and 20% on lifetime transfers where charges apply. For 2019/20 the first £325,000 chargeable to IHT is 0% and known as the ‘nil-rate band’.
There is an additional Residence Nil-Rate band (RNRB) is available where a residence is passed to a direct descendent. Currently the amount of relief is £150,000 and is set to rise to £175,000 for years 20/21.
There is a lot of information available online and it may feel a little overwhelming, so it is worth speaking to an Accountant, as they will be able determine the relevance to yourself and help you to understand the terminology.