If clients are not utilising their gifting allowances then this is an area that should be considered. This can be done by giving money direct to beneficiaries, making contributions to savings plans either owned by or under trust for the beneficiaries, or contributing to a whole of life plan.
If clients are willing to give up control and access to some of their assets then it may be appropriate to consider making larger gifts. Clients could choose to gift specific assets or give away money either direct or via a trust arrangement.
When gifts are made they will only be completely outside the donor’s estate for IHT purposes after 7 years, so in some circumstances it may be appropriate to consider arranging an appropriate life assurance policy under trust to cover any tax arising in respect of the gift.
One way to avoid having to pay inheritance tax is to give money away. Gifts can either be considered as exempt, potentially exempt or as chargeable transfers, these different types of gifts are detailed below. Gifts are valued as the reduction in the donor’s estate. Care should be taken to ensure that when a gift is made the donor does not continue to derive any benefit from the assets given away.
Everyone has an annual gifting allowance of £3,000. This means they can make gifts up to this amount each year and they will not need to be considered for inheritance tax. Any unused allowance can be carried forward for one year.
• An individual is also permitted to make a number of smaller gifts of up to £250 in value to different individuals (but this cannot be aggregated with the £3,000 explained above).
• Gifts can be made on marriage/civil partnership of up to £5,000 to children and their spouse, £2,500 to grandchildren, and £1,000 to anyone else.
• Any surplus income an individual has can be given away, as long as this is not income derived from capital, and giving it away does not affect the individual’s lifestyle.
• Gifts of any amount can be made to established political parties and to registered charities.
Potentially Exempt Transfers (PETs)
A potentially exempt transfer is a gift which is not subject to IHT when it is made and if the donor survives 7 years, it will be considered as being outside their estate and not subject to IHT.
The Finance Act 2006 significantly narrowed the range of what can be considered a PET, however there are still some gifts which fall into this category;
• A direct gift to another individual, with no trust arrangements involved
• A gift into a bare trust
• A gift into a trust for a disabled person
• A bereaved minor's trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime.
Chargeable Lifetime Transfers (CLT’s)
Since 22 March 2006, most gifts into trust (with the exception of those detailed above) are now classed as Chargeable Lifetime Transfers (CLTs). These transfers are subject to an immediate tax charge of 20% on any amount in excess of the nil rate band (£325,000). In order to work out whether the NRB has been exceeded on a transfer you need to take into account all 'chargeable' (i.e. non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the NRB, Inheritance Tax is payable at 20% on the excess.
Chargeable lifetime transfers include gifts into Discretionary Trusts, Interest in Possession Trusts, Accumulation & Maintenance Trusts and transfers into companies. These types of trust are the most common for inheritance tax planning arrangements. As well as an initial tax charge of 20%, there can also be a periodic tax charge of up to 6% of the value of trust assets over the NRB every 10 years, and an exit charge proportionate to the periodic charge if funds valued above the NRB are taken out of the trust between the 10 year anniversaries.
Gifts with Reservation
A gift which is not fully given away is a gift with reservation. A gift with reservation remains part of the client’s estate for IHT purposes indefinitely, unless the reservation ceases. If this happens then the donor will need to live 7 years from the date the reservation ceased in order for the asset to be completely outside their estate. Examples of gifts with reservation include a client giving their property to their children and continuing to live there.
Pre-owned Assets Tax Charge
If an individual gives away an asset but continues to derive a benefit from the asset, they may be subject to a pre-owned assets tax charge. This is an income tax charge that is based on the value of the benefit derived from the asset that had previously been given away. If someone is caught by this charge it may be possible to elect to have the asset treated as a gift with reservation instead, meaning it would be part of the estate for IHT.