Inheritance Tax and the effects of gifts
A lot of people will quite understandably assume if they can give their estate away it won’t be taxable.
This unfortunately is not the case the Inland Revenue has spotted this potential loophole a long time ago and pretty much closed it. That is not to say that you cannot give away your estate but in the short term it is still taxable.
There is some rules surrounding gifts that are very important to know and they are as follows:-
Annual exemption – You are allowed to give up to £3,000 tax free per year either as one single gift or a number of gifts adding up to the £3,000. You should bear in mind that this exemption can be carried forward one year if it is unused thus providing potentially £6,000 of exemption.
Small gift exemption – are also allowed to gift up to £250 per annum to as many individuals as you like.
Civil Partnership of wedding gifts – You are able to give a gift up to a certain value to anyone getting married or registering a civil partnership. This however does depend on your relationship with the beneficiary, parents can give £5,000 any other relative can give £2,500 and a non-relative can give £1,000. These gifts have to be made on or before the wedding day and if the wedding does not take place then the exemption on the gift is not valid.
Finally you are allowed to make what is known as regular gifts. These gifts have to be made from normal after tax income and they are such things as regular payments to someone or Christmas or Birthday gifts and also regular premiums to life insurance for another person. The key factor here is they have to be regular so not one off or they could be treated as PETs.
Inheritance Tax Exemptions
It is worth noting that there is a difference between IHT exemptions and IHT reliefs. Exemptions tend to be on payments made and transfers made. Whereas reliefs are normally applied to assets themselves such as business relief etc.
The main exemptions to know about are as follows:-
- The most common exemption and also the most commonly used exemption is the between spouses. Any assets that transfer between husband and wife or officially recorded civil partners is completely free of any inheritance tax. These transfers also take place without using up any of the nil rate band which is why it is transferable under the Spouses threshold transfer
This is not really an exemption in the true sense of the word but the fact is you don’t pay tax as a result of it. Basically the revenue allow you to deduct any and all debts against the estate prior to calculating any inheritance tax liability.
Everyone has an annual exemption to the value of £3,000. This amount can be carried forward a year but only one year if it is not use then it expires. So technically you could give away £6,000 in one year if you had not used it the year previous. Then the following year you would have a further £3,000 exemption to use.
There are certain gifts that are exempt from inheritance tax over and above the annual exemption of £3,000. Due to the fact that there is a few of these we have devoted a page to them that can be found by clicking on the box below marked GIFTS.
This is also covered in the section marked Gifts below.
It is worth knowing that some beneficiaries themselves are exempt. So any payment to them will just reduce your estate for inheritance tax purposes. They are as follows:-
- The obvious one your husband/wife or civil partner.
- Any UK registered charity
- Some national organisations such as National Trust, Universities, and Museums
- And finally United Kingdom registered political parties.
There is a way that you can give your whole estate away and pay no tax at all. This way has been a managed way of passing large estates down the generations by wealthy families for centuries. This type of transfer is known as a “Potentially Exempt Transfer” or a PET.
In short, wealthy families who have large estates would plan to pass the whole estate onto one or two heirs, typically eldest son or daughter. This would normally take place when the son or daughter was over twenty one.
Now as long as the parents survived a period of 7 years there would be no tax whatsoever due on that part of the gifted estate. This rule is known as Taper relief.
It is important to bear in mind that when making a large gift it has to be in excess of the nil rate band to benefit from any potential reduction in the potential tax due as a result of the taper relief.
In addition it is also important to be aware that any gift made essentially uses up the nil rate band and could push the remaining estate into a full rate of tax with no relief at all for the subsequent 7 years.
So for example if you use the figure of £320,000 as a guide for the nil rate band and you pass £400,000 over as a gift then £320,000 of that amount will be taxed at nil rate and £80,000 will potentially be taxed at the rate calculated below depending on when death occurs after the gift is made.
However if there is any money left in the estate this will now be taxed in full for the next 7 years as the nil rate band has been passed with the gift.
It has to be said it is very complicated and this is why you need a specialist to assist you in effectively planning for it correctly.
- If death occurs within the first 3 years after the transfer there will be 100% of the tax due.
- If death occurs between years 3 and 4 then only 80% of the tax will be due
- If death occurs between years 4 and 5 then only 60% of the tax will be due
- If death occurs between years 5 and 6 then only 40% of the tax will be due
- Finally if death occurs between years 6 and 7 only 20% of the tax would be due.
So in summary the tax is still 40% but depending on the year of death after the transfer is made anything from 100% of that 40% to 20% of the 40% may be due, and then obviously if you survive the 7 years then no tax is due at all.
Do not think for one minute that you have to be a wealthy land owner to benefit from the 7 year rule because you don’t all you have to have is an estate that carries a potential tax bill and the rest is just good tax planning.
Please take the time to use our calculator below to determine how much tax would be due on a PET after a certain period of time.
Please note that this calculator is only a guide and in no way guarantees the amount of tax that will be due on and potentially exempt transfer. That said it will give you an indication of the amount of tax that should be due. You will need to know what tax would be due at outset in order to calculate the tax due after time.
Having given your maximum allowances in gifts and exemptions that qualify, the only thing for you to know now is whether or not your estate qualifies for any of the inheritance tax relief is available under the system.
This is quite a complex relief and some things qualify whilst others don’t but in simple terms it allows you to pass on business assets without the payment of IHT it includes such things as property buildings shares and machinery. Depending on what it is exactly that is being transferred it can qualify from between 50% and 100% tax relief.
This one is much simpler. It is attributed to agricultural property such as farms for instance. It includes farmland and buildings and property but does not include machinery. That said the machinery may qualify for business relief so it is worth checking with the revenue on that one.
Please note that any relief is complicated and may also be somewhat subjective, so it is well worth ensuring that you seek good advice before making any lasting decision regarding your IHT liability. For a free no obligation chat with one of our specialists please click on the contact button at the top of this page.
You may or may not have heard about trusts but it has to be said they are a very good way of distributing money or assets in accordance with your wishes.
They are extremely effective and can also be very complicated.
A trust is essentially a vehicle designed to distribute money or assets at a specific time in the future. They can also be used to control how money is retained and invested and the uses that the money can be put to. They can not only control the ultimate pay-out but also any regular distribution of profits within them.
The one most important thing about trusts especially when talking about inheritance tax is they CAN fall completely outside your estate and therefore CAN be free of inheritance tax altogether. We say “can” because some trusts can become “Potentially Exempt Transfers” and therefore are subject to the 7 year rule for PETs.
If you do want to set up a trust we have specialist legal advisors available who can discuss all the pros and cons of a particular trust that might be suitable for you.
The Chancellor announced that the Inheritance Tax allowance has been doubled for couples and civil partners to £600,000 with immediate effect. This is true but for many couples this is nothing new as they already have a nil rate band discretionary trust within their wills. The question is whether such wills should now be reviewed and replaced with simple wills? The following points should be considered:-
At this stage the finer details of the changes to IHT have not been published or analysed. It would be prudent to wait and see before rushing through any changes. For instance, what happens if the surviving spouse remarries?
In many estates, the presence of investment property or business assets offers the possibility for these assets to be put into a Discretionary Trust on the first death. The value of these assets could well increase faster than the Chancellor raises the IHT threshold in the future. In such cases it would be advantageous to retain the present nil rate band arrangement.
With most nil rate band will arrangements the assets are effectively loaned, after the first death, to the surviving spouse. This loan can be on such terms as the trustees and spouse agree. The method for calculating interest could therefore be based on house price inflation which again could see faster growth than the nil rate band.
Clients are concerned not only with tax but also with protecting assets for their children. A discretionary trust arrangement offers protection in this regard.
Therefore it is premature to consider changing such wills. Once the position becomes clearer change may or may not be required but it is too early to say.
CGT looks set to be charged at a flat rate of 18% from the 6th April 2008. If an individual holds assets which qualify for business taper relief in full then the effective rate of CGT is currently 10%. Anyone considering a sale in the near future should therefore consider completing this before next April or alternatively transferring the assets to a Trust in which they are self-interested. This will trigger the disposal but the rate will be 10% not 18%. The Trustees will then sell but their base cost will be the value on the date of the Trust so the asset is unlikely to have increased in value. Our team are happy to discuss any of these changes with you.
If a member of your family dies with or without a Will, we can undertake the legal work involved in winding up the estate on behalf of the family. If you have been appointed Executor of the Estate, you don’t have to do the work yourself. It is quite usual to ask your Solicitors to undertake the legal work for you.
We will prepare the legal documents to obtain a “Grant” from the Probate Registry. This is a document which gives you authority to deal with the assets in the Estate – to sell a house or shares, to collect the money from a Building Society or other savings and to distribute the estate to the beneficiaries. We will collect in the assets and turn them into cash where appropriate, pay any outstanding bills, negotiate with the Tax Authorities about Income or other Taxes and Inheritance Tax, and prepare an account for approval to distribute the Estate among the beneficiaries.
- If the deceased leaves no children: – Spouse gets £125,000.00 and one half of residue. The other half of the residue goes to the next of kin of the deceased, not to the surviving spouse.
- If the deceased leaves one child: – Spouse gets £75,000.00 and half of residue, the other half goes to the child.
- If the deceased leaves two children or more: – the Spouse gets £75,000.00 and one third of the residue, the other two-thirds is divided equally between the children.
We will also advise you in relation to any anticipated litigation in respect of an Estate. It may sometimes be necessary to refer a Will to the court to see whether the person making the Will has in all the circumstances made reasonable provision for one of his/her dependants. In these cases strict time limits are applied and an early consultation is essential.
If you feel that the person making the Will was mentally incompetent or had been unduly influenced in making the Will by someone else, then you can have the case referred to Court for a decision.
Educated at St Colman’s College in Newry, Kevin graduated from University College Dublin in 1982 with a degree in Law (BCL).
He graduated from Queen’s University Belfast with a Certificate of Professional Legal Studies in 1984 and was admitted to the Roll of Solicitors in Northern Ireland in 1984. He was later admitted to the Roll of Solicitors in the Republic of Ireland in 1992, as well as in England and Wales in 2008. He qualified as a Solicitor Advocate in 2013. He is also a certified Mediator.
Kevin has worked at Donnelly Neary & Donnelly since he was admitted to the Roll in 1984 and has been a partner in the firm since 1988.
Kevin is a Notary Public, and is currently the President of the College of Notaries in Northern Ireland. He is also a Trusts and Estates Practitioner (TEP) of the Society of Trust and Estate Practitioners (STEP) and a member of the NI Commercial Property Lawyers Association. Kevin currently acts as Treasurer for the Irish Legal History Society and is Deputy Chair of the Statutory Committee for the Pharmaceutical Society of Northern Ireland.
Kevin has experience in all areas of practise; however, Kevin specialises in commercial property, as well as in general conveyancing, trusts and wills.
Brendan Hagan LLB graduated from Queen’s University in 1973 with a BA Honours Degree in Modern History.
Brendan commenced practising as a Solicitor in 1978 and completed his apprentice with John P Hagan.
Brendan specialises in Criminal, Matrimonial and employment law and is a Solicitor Advocate and a member of the Children Order Panel.
Brendan has acted in a number of high profile criminal cases as well as Public Enquiries.
Educated at St Patrick’s Academy Dungannon, Ellen graduated from University of Ulster Magee with a degree in Law with French (LLB).
Ellen obtained a Postgraduate Diploma in Professional Legal Studies from the Institute of Professional Legal Studies at Queen’s University Belfast in 2017.
Ellen works from our Portadown Office JPH Law, our Armagh office Gordon Wallace & Co and our Dungannon office Simmons Meglaughlin & Orr.
Ellen specialised in Conveyancing, Employment and Wills.
Kate Ervine graduated from Queen’s University and completed her degree in Law & Accountancy in 2006 and Trust & Estate Administration in 2009.
Kate was formerly employed by two provincial firms before joining the practice in August 2007. Kate specialises in Conveyancing, Administration of Estates; contentious Probate; Will drafting; Agricultural law and Taxation. Kate is a member of the Society of Trust and Estate Practitioners.
Educated at St Joseph’s Grammar School Donaghmore, Kathryn graduated from Queen’s University Belfast in 2002 with a degree in Law and Politics (LLB).
Kathryn obtained a Postgraduate Diploma in Legal Practice with Distinction from Northumbria University, Newcastle upon Tyne in 2003.
In 2005 Kathryn was admitted as a Qualified Solicitor in Northern Ireland, England and Wales.
Kathryn worked in our Portadown office JPH Law in 2018 and later moved to our Dungannon office Simmons Meglaughlin & Orr.
Kathryn is a multifaceted general practice Solicitor who specialises in Property, Probate and Wills. She also practices in Matrimonial Law, Children’s Law, Personal Injury and General Litigation.
Sean Hagan LLB Dip Law (Tax) graduated from Queen’s University and has practiced as a Solicitor since 1968.
Sean purchased the firm of PM Cullen & Co., and commenced trading as John P Hagan Solicitor in 1976. Sean specialises in Planning and Licensing and receives referrals from other Solicitors in Planning matters.
Sean is a member of the Royal Institute of Town Planning, is a Fellow of the Chartered Institute of Arbitrators. Sean served the community for many years on the local Council and as the firm’s Senior Partner.
Michael graduated in law with LLB Hons from Queens University Belfast in 1985 He works with JPHLAW as well as being the Principal of Campbell & Grant in Newry.
Michael’s legal expertise includes conveyancing, criminal law, commercial property acquisition, sales development, residential property development, licensing, planning, trusts, inheritance tax, wills and estates both in Northern Ireland and in the Republic of Ireland.
Aoife was educated at Assumption Grammar School, Ballynahinch, before attending Queen’s University Belfast, where she graduated with a degree in Law & Politics (LLB).
She then studied at the Institute of Professional Legal Studies, Queen’s University Belfast, and was admitted to the Roll of Solicitors in 2011.
Aoife has particular interest in litigation and family law, as well as probate and criminal law.
Educated at Portadown College, Helen graduated from Queen’s University Belfast in 1995 with a degree in Law (LLB).
She then studied at the Institute of Professional Legal Studies, Queen’s University Belfast, and was admitted to the Roll of Solicitors in Northern Ireland in 1997. Helen has a Certificate in Commercial Conveyancing, and also has an ILM Level 5 Diploma in Leadership.
She currently sits on the Board of Governors for Waringstown Primary School.
Helen has a particular interest in residential conveyancing, commercial property, wills, and the administration of estates.