In addition, if, upon your spouse/civil partner’s death, they leave their main residence to a ‘lineal descendant’, such as children, they may have available a further IHT NRB called the ‘Residence Nil Rate Band’ (RNRB). This is worth £175,000 for you and your spouse/ civil partner, thus a further £350,000. Therefore, upon second death this could result in £1 million being free of IHT. The full RNRB is only available if the survivor’s estate is below £2 million and therefore lifetime gifts may be prudent to reduce the survivor’s estate. A gift (also known as a transfer of value) is one where the value of the estate of the person making the gift is less after than it was before. This seems obvious but it is the difference between the value of the estate before and after the gift which is taken into account for IHT purposes.
It is also important that the donor not take any form of benefit from assets given away as this could prevent the seven-year clock running. Further, as Ivar Sala explains, a ‘key problem with making large gifts is making
sure you have enough for your own requirements after the gifts. Financial
modelling tools can help provide valuable insights to help avoid any potential detriment to financial security as a result of making gifts.’
After safeguarding your own security, making gifts is a way of mitigating IHT.
Normal expenditure out of income The law allows immediate exemption to regular gifts if, taking one year with another, it can be shown the transfers meet certain requirements. As such you could pay your grandchildren’s school fees out of excess income or pay towards a life policy to pay the IHT on death. To produce excess income ‘Individuals with large investment portfolios can make changes to the investment strategy with the aim of increasing the income or dividend yield to potentially produce more income for Gifting purposes,’ explains Ivar Sala. The exemption is instant and absolute but in general, gifts out of income must be cash. When trying to give gifts out of such income, it is beneficial to prepare and retain documents establishing that you have surplus income and that you have the intention to make regular gifts.
However, there are some IHT exemptions and reliefs available when gifting the following:
Normal gifts out of income; Family maintenance; Annual exemption of £3,000; Small gifts of up to £250; Gifts in consideration of marriage; Gifts to Civil Partner/Spouse; Business Property Relief/Agricultural Property Relief
If you decide to make a gift to an individual which is not covered by one of the above exemptions and reliefs, this would be classed as a potentially exempt transfer (PET). PETs may not be subject to IHT if the person making the gift survives seven years from the date of the gift. If they do not survive seven years, then the gift becomes subject to tax and forms part of the estate. If the total lifetime chargeable gifts are within the NRB then the gifts would eat up the NRB first leaving less available for the estate. If the amount given away exceeds the NRB, IHT will be payable on the gift by the recipient. The tax may be reduced on a sliding scale. This is known as ‘taper relief’ and the recipient of the gift will start saving the tax payable after three years rather than waiting for seven years. There are no limits on the number or value of PETs you can make.
"To mitigate the IHT payable, you may be
thinking about gifting some of your wealth to ensure your heirs receive more of your wealth however, different gifts may have different tax consequences."
THE LEGAL CORNER MAGAZINE | ISSUE 007 APRIL '24 | PRIVATE CLIENT SPECIAL HB 10
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