Gifting capital reduces the size of an estate and making certain types of gift can have an immediate Inheritance Tax ("IHT") benefit.
You can gift up to £3,000 each tax year completely free of IHT and if this amount is not used in one tax year, then it can be carried forward to the next tax year (for one year only). In addition, you can also make small gifts of up to £250 each and there is no restriction on the number of recipients.
Another valuable but often overlooked IHT exemption relates to regular gifts made from excess income and which are considered be part of an individual's "normal expenditure out of income."
To qualify, these gifts must be:
- Made on a regular basis (i.e. not a "one-off");
- from income rather than capital;
- Of an amount which does not impact on an individual's usual standard of living (after all routine bills and costs are taken into account). There is no limit on the amount, as long as the criteria are met. The end of a tax year (or at the very beginning of the new one) is an excellent time to consider whether the level of income net of expenditure allows for this exemption to be utilised.
A planning opportunity?In the UK Government's Budget last year, the Chancellor confirmed his intention to introduce a new residence "allowance" in addition the standard nil rate band allowance (currently £325,000) already in place. The" Main Residence Nil Rate Band "will apply where someone who dies after 2017, leaves his or her interest in a property which has at some point been his/her main residence (although not necessarily at the time of death) to one or more of their "direct descendants". It is understood that direct descendants will include children, step children, adopted children, foster children and grandchildren.
It is proposed that this allowance will be available from April 2017, starting at £100,000 and eventually rising to £175,000 in 2020/21. If unused at the time of the first death (for example if there is a surviving spouse who will benefit initially), like the "standard" Nil Rate Band, this can be transferred between spouses/civil partners.
Some families whose largest asset is the family home and whose other wealth (including the property) keeps them below the combined nil rate bands of £1 million, will from 2020/21, find themselves able to pass on their whole estate to the next generation free of IHT; a potential maximum tax saving of £140,000.
What does this mean for you? There is still some uncertainty with regard to some of the finer detail but for many, these proposals are likely to provide an excellent planning opportunity and individuals who are likely to be affected should be taking proper advice on their succession and inheritance tax planning now to consider how they are likely to be impacted. Wills should also be reviewed to ensure these are as tax efficient as they should be.