Make the most of inheritance tax reliefs and exemptions

Inheritance Tax is the tax paid by our estate on our death against the value of our estate. Inheritance tax is payable at 40% over the nil rate band.

There are several reliefs and exemptions available, and it is recommended that you are aware of these and plan early to take advantage of them.

The following is a summary of the basic principles of those reliefs and exemptions.

Lifetime gifts (£3,000 annual allowance)

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. You can give gifts or money up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year – but only for one tax year.

Small gift allowance

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Regular gifts of income

You can make regular gifts and there is no limit to how much you can give free of inheritance tax, as long as:

  • You can afford the payments after meeting your usual living costs, and
  • Your gift is made regularly. This means gifts can be made monthly or even once a year provided it can be demonstrated that the annual gift is made at the same time each year. Setting up a standing order is a good way to demonstrate a gift is regular

These are known as ‘normal expenditure out of income’.

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them. This is known as the 7 year rule.

If you die within 7 years of giving a gift, it is then necessary to review this gift to establish if inheritance is payable on the gift. If inheritance tax is payable there is then a relief that reduces the inheritance tax payable. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

I advise that the above reliefs and exemptions are worth considering as some benefit from immediate inheritance tax relief whilst others start the “7 year clock running” so that they may fall outside of your estate for inheritance tax purposes.

Brian King

Nil rate band

This is the standard exemption applying to the majority of estates. The inheritance tax nil rate band is £325,000.

Transferable nil rate band

Where the first of a married couple or civil partners dies and all or part of their nil rate band is unused when their estate is distributed, their nil rate band is transferred and available to be used in determining the inheritance tax payable on the death of the surviving spouse.

Residence nil rate band

In addition to the regular nil rate band, there is an additional nil rate band which can be claimed against the deceased’s residence. This additional £175,000 leaves scope for a total inheritance tax free allowance from the nil rate band of £500,000. To claim this additional nil rate band, the property must be the deceased’s ‘principle private residence’ (main house and not eg a holiday home), be passing to direct descendants (children, grandchildren etc), and the total estate must be under £2,000,000 (over which there is a tapered relief).

Transferable nil rate band

Any residence nil rate band that is not used when someone dies can go to their spouse or civil partner’s estate when they die. This transfer can also happen if the first of the couple died before 6 April 2017, even though the residence nil rate band was not available at that time.

The nil rate band, transferable nil rate band, residence nil rate band and transferable nil rate band can mean that there is a £1,000,000 tax free allowance for inheritance tax. It is worth taking advice to ensure that your Wills are drafted in such a way that a married couple or civil partners can benefit from this £1,000,000 allowance.

Brian King

Spouse exemption

Gifts whether made during lifetime or in your Will to a surviving spouse are exempt from inheritance tax irrespective of the amounts involved.

In summary, there are plenty of reliefs and exemptions available so that individuals can mitigate inheritance tax by lifetime gifts. Also, you should consider how your Wills are written to ensure that you do not miss out on £1,000,000 inheritance tax allowance available to married couples or civil partners.