Inheritance Tax Exemptions and Reliefs
There are a number of exemptions and reliefs to Inheritance Tax which an individual can take advantage of during his or her lifetime.
The Annual Exemption
A person may make gifts of up to £3,000 each year completely free of Inheritance Tax. Unlike the potentially exempt transfer (explained below), this exemption applies regardless of the nature of the recipient of the gift and there is no requirement for survival by the donor for a period of time. If this exemption is wholly or partly unused in any year, it or the balance may be carried forward to the next year, but not to any following years.
Potentially Exempt Transfers
Potentially Exempt Transfers enable an individual to make a specified gift of unlimited value, which will escape Inheritance Tax completely if he or she survives for a period of seven years following the gift.
The gift must be made to one of the following recipients: another individual the trustees of a trust in which an individual has an interest in possession the trustees of an accumulation and maintenance trust the trustees of a disabled persons trust If the donor does not survive the gift for seven years but survives for more than three years, then the Inheritance Tax rates are tapered to reduce the tax payable, although to receive the full exemption one must survive seven years.
Discretionary Trusts
No tax is payable on any gift unless the cumulative total of all gifts made within any seven year period exceeds £263,000. Although unlimited tax-free gifts can be made by way of potentially exempt transfers as above, in some cases, it may be preferable to make gifts within the nil-rate band to a discretionary trust. This would apply for example to individuals who perfer to have flexibility of placing assets into a discretionary trust under which they are excluded as beneficiaries or to individuals who as yet have no children. This will allow further gifts to be made to the trust or to another trust seven years after the initial gift. The merits and further information of the types of trust can be obtained on request. Normal Expenditure out of incomeThis exemption applies to a gift if or to the extent that it is shown that- the gift is made as part of the normal expenditure of the donor taking one year with another, the gift is out of the donor's income after allowing for all the other gifts or dispositions forming part of his or her normal expenditure, the donor is left with sufficient income to maintain his or her usual standard of living Whether a gift qualifies for this exemption is a question of fact in each case and according to the Inland Revenue, normally is considered to be typical or habitual. There are complicated further conditions attaching to this exemption and therefore individual legal advice must be taken to ensure a claim for this exemption is appropriate.
For further information contact the Wills & Probate Department direct on 024 7649 3111.
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