What is Exempt from Inheritance Tax?

 

There a number of InheritanceTax exemptions and this article will outline exactly what is exempt in order to assist you with some basic tax planning.

If your estate is worth more than £325, 000 which is the present IHT threshold, there are  a number of tax exemptions that you should consider.

The following will apply whether they are made before you die or as part of your will:

 

Exempt Beneficiaries 

  • Spouse or Civil Partner (as long as they are in the UK)
  • Charities
  • Political Parties based in the UK
  • Some National Institutions for example the National Gallery

 

Annual Exemption

You can give away up to £3, 000 each year. If you do not use the full £3, 000 that year you can carry it over to the next year, however, if it is not used the following year, it will expire and it cannot be carried over again.

 

Small Gifts 

You can make small gifts of £250 to as many people as you like, however, it should be noted that this exemption cannot be combined with another exemption in order to give a larger gift. Also, you cannot give a larger gift than £250 and claim small gift exemption for the first £250 of the gift.

 

Regular Gifts that are part of normal expenditure


Any regular gifts you make out of your regular income are exempt from Inheritance Tax. However, these gifts will only qualify if you have enough income left after making them to maintain your normal standard of living.

These include:

  • monthly or other regular payments to someone
  • regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
  • regular premiums on a life insurance policy - for you or someone else


You may also make the following exempt maintenance payments to:

  • your spouse or civil partner
  • your ex-spouse or former civil partner
  • relatives who are dependent on you due to old age or infirmity
  • those of your children who are under 18 or in full-time education

 

Potentially Exempt Transfers – PET’s 

Any gifts you make during your lifetime will be exempt from IHT provided you survive for seven years after making the gift. This is known as the’ seven year rule. ’

If you die within seven years of making a gift and the amount of the gift(s) are below the tax threshold, the total value of the gift(s) will be added to the threshold and IHT will have to be paid accordingly out of the Estate.

If you die within seven years of making a gift and the value of the gift is greater than the IHT threshold then the recipient / donee of the gift or the representatives of the Estate will have to pay the IHT due on the value of the gift.

If you die within three and seven years of making a gift and the total value of the gifts is more the IHT threshold then tax will have to be paid on a sliding scale, known as ‘taper relief’ on the value of the gift. Click here to access the HM Revenue and Customs website to work out how you value gifts.

 

It is therefore very important when preparing your Will to do some basic tax planning beforehand. Full advantage should be taken of the various exemptions and detailed records should be kept of any lifetime gifts.