This news bulletin is designed to provide an overview of current regulations regarding inheritance tax (IHT) and making gifts out of one’s estate. It is not exhaustive and should not be relied upon as advice.
Everyone’s estate is exempt from IHT up to a threshold which is known as the “nil rate band”. The nil rate band was slowly increased each year until 6 April 2009, since when it has been frozen at £325,000. In addition, the passing of assets between spouses does not usually give rise to an IHT liability, though a liability may arise if the receiving spouse is domiciled outside the UK.
Since October 2007, if the IHT nil rate band of a deceased spouse is not fully used in calculating the IHT liability on their estate, any unused proportion passes to the surviving spouse. For example, if the first spouse died in December 1996, the nil rate band at that time was £200,000. If £100,000 of their estate was left to other beneficiaries and the remainder to their surviving spouse, then 50% of their nil rate band would remain (since the transfer to their spouse is exempt). Under current regulations, this would mean that on the death of the second spouse, an additional 50% of the nil rate band (at that time) could be transferred to the second spouse, i.e. £162,500. Similarly, if the whole estate is left to the surviving spouse on the first death, the nil rate band available on the second death would be £650,000.
There are also several exemptions and reliefs which may apply:
- As mentioned above, gifts between spouses, either during their lifetime or on death, are normally free from IHT.
- There is an annual exemption allowing gifts to be made up to the value of £3,000 each tax year. These would be completely free from IHT. It is possible for this to be carried forward for one tax year if it is not used.
- There is also a small gift exemption, which allows gifts to be made of up to £250 per person each tax year, to any number of different people. This cannot be used in conjunction with any other exemption when giving to the same person, such as the £3,000 annual exemption.
- Regular gifts out of income that are part of normal expenditure are free from IHT, provided that this does not affect the donor’s usual standard of living.
- Gifts on marriage up to set amounts (higher for parents and grandparents) are exempt from IHT.
- Gifts to charities or certain other qualifying organisations, either in lifetime or on death, are exempt from IHT (in addition, if over 10% of the estate is left to charity, then the rate of IHT payable on any excess over the nil rate band may be reduced from 40% to 36%).
- There are various reliefs for business assets, agricultural property and forestry.
- Furthermore, to encourage investment, the government has introduced tax incentives on certain investments such as Enterprise Investment Schemes (EISs) and stocks listed on the Alternative Investment Market (AIM). However, these are often quite risky investments, and it must be ensured that they would be suitable from an investment perspective as well as from a taxation one.
Most other gifts made to individuals will be exempt from IHT as long as the donor lives for seven years after making the gift. These sorts of gifts are known as “Potentially Exempt Transfers”. However, if the donor dies within seven years of making such a gift, there will be an IHT liability. The rate of IHT applicable is reduced on a sliding scale if death occurs between three and seven years after making a gift. The rules on gifts to trust are more complicated and our advisers would be happy to discuss these in detail as appropriate.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
