EDITION 3 | NOVEMBER 2021
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However , they may now , unknowingly , find that gift included in the value of their estate .
Before I explain this further , let ’ s remind ourselves about the main exemptions available when making gifts , because gifting can be one of the most effective ways of reducing one ’ s estate to ease the potential tax bill on death .
Annual exemption
Currently worth £ 3,000 ; this is the value of gifts which can be given away each tax year without them being included in the value of the estate .
Marriage and civil partnerships
All lifetime gifts and gifts on death to a spouse or civil partner are exempt from IHT ( subject to being a UK resident ). This means that the unused nil rate band and residence nil rate band can be transferred and used on second death . This can give the magic million amount ( two nil rate bands of £ 325,000 plus two residence nil rate bands of £ 175,000 ).
Small gifts
You can make gifts up to the value of £ 250 each year to anyone , with no limits on the number of £ 250 gifts that can be given , however , they mustn ’ t have received gifts from you in the same year , so if you ’ ve already gifted someone your full £ 3,000 annual exemption , you cannot then gift them a further £ 250 .
Normal expenditure out of income
This is one of the lesser-known ways of reducing the value of one ’ s estate but it can be one of the most effective , and that ’ s to gift money from your surplus income . This exemption is technically unlimited subject to three tests . It has to be from income not capital , it has to be regular and it can ’ t reduce the standard of living of the person giving the gift . It can be used for paying for school fees , pension contributions or ISA savings for children or grandchildren and so on . Another way to ‘ gift ’ surplus income could be to set up a whole of life policy written under trust , not only will the benefit on claim be paid outside of the client ’ s estate but the policy premiums , being made from surplus income , will not be subject to IHT .
Charities and political parties
During your lifetime and on death you can make gifts to registered charities and political parties which won ’ t be included within your estate when calculating IHT . If you leave at least 10 % of your estate to a registered charity upon death , the IHT tax liability will decrease to 36 %.
Weddings and civil ceremonies
You can make gifts of up to £ 1,000 per person or £ 2,500 if it ’ s a gift to a grandchild or great-grandchild ’ s wedding , and £ 5,000 if it ’ s a child ’ s wedding .
It ’ s that last point which is of particular importance in light of COVID-19 . IHTM14191 of the HMRC ’ s IHT Manual states that for a gift being made in consideration of marriage to be exempt for Inheritance Tax , it must be made :
1 on or shortly before a marriage or the registration of civil partnership takes place
1 to one or both parties to the marriage or civil partnership , and
1 to become fully effective when the marriage or registration of civil partnership takes place .
Yet , with many weddings being cancelled at short notice , if the gift has become fully effective before the wedding takes place , this could create an issue as the exemption would not be available . Should the donor of the gift sadly pass away within seven years of making the gift , if there is no other exemption available , the gift will be included within the value of their estate .
As people are becoming more aware of their own mortality and the impact of their estate in light of COVID-19 , why not take this opportunity to talk estate planning with your clients ? Ask about the family and find out if there have been any weddings cancelled where monetary gifts have been given .
adviser . royallondon . com