Potentially exempt transfers
If you make a gift (that is not immediately chargeable to inheritance tax) and survive 7 years after making the gift, this amount is not included within your estate for IHT purposes. By way of an example, the deceased gifted their property, worth £1m, to their daughter in 2011 and moved into a care home. On death, in 2020, they leave £500k cash to their child. Ignoring all other reliefs, the tax to pay will be £175k @ 40% (which is the amount above the £325k nil rate band). The gifting of the property is ignored and left out of the calculation because 7 years have passed since the gift. The rules also provide for taper relief, that is, a reduction in the tax payable if the deceased doesn't survive 7 years. The taper relief applies from 3 to 7 years (providing a lower tax bill the closer one moves to 7 years. The calculations can become quite tricky in these circumstances so contact us for a quote.
Business property relief
For small business owners, this means shares held in the trading business. So, for example, if you are a furniture retailer and own 2 shops on the high street, these shares can pass to your beneficiaries without incurring IHT. The relief is automatic and given at 100% if the shares were held for 2 years. This also applies to a business or interest in a business (a holding in a partnership for example). There are of course exceptions so contact us with your personal details.
Gifts in consideration of marriage
Gifts of up to £5,000 by a parent, £2,500 by a grandparent
Normal expenditure out of income
Payments or gifts out of normal earnings. HMRC would want to test if by making a payment of gift of cash would the taxpayer still be able to maintain their standard of living. HMRC might ask to see evidence of income and expenditure for the last 7 years so good record keeping is a must.
Annual £3k allowance
The first £3,000 of lifetime transfers in any tax year are exempt. If unused in the previous year, the amount can be bought forward.
Gifts to Charities, political parties, registered housing associations and gifts for national purposes
The estate pays tax at 36% if more than 10% of the estate is left to charity. The gifts themselves are exempt.
Life insurance policy
If you think your estate will pay tax on your death and you want to reduce/eliminate the IHT charge, you should consider purchasing a life insurance policy. The key however is to ensure it is not made payable to you in the event of death because it will form part of your estate. You should speak to a legal expert and put this into a trust document.