Ensure You Use Inheritance Tax Personal Gift Exemptions
Published / Last Updated on 04/12/2023
In the UK, we each have an Inheritance Tax Nil Rate Band Allowance of £325,000 plus a private Residence Nil Rate Band of £175,000 (if we own our own home and we leave it to direct line descendants). If you die first, your surviving, legally married, spouse or civil partner can also claim any of your unused allowances and to their own allowances, meaning up to £1,000,000 may be inheritance tax free on 2nd death. As you may know, we suggest this is a dangerous strategy because if you do not inheritance tax planning and your surviving needs to seek means testing social care in later life, the whole of both your wealth and their wealth may be included in any means test.
See Residential Nil Rate Band: RNB Trusts
We therefore suggest that you should always be using your full annual gifting allowances that are immediately outside your estate to protect some wealth. Make your you use your Personal Gifting Exemptions as detailed below:
A. Annual Exemption £3,000 pa and carry forward last year’s unused exemptions Married Couples and Civil Partnership – Double Up and all of these payments are immediately Outside Estate.
B. Unlimited £250 gifts to anyone. This is unlimited, you can make as many £250 gifts to different people as you wish and we hope we meet you on the street when you are doing this but not has not happened to us yet.
C. Gifts from Normal Income provided it does not affect your standard of living, but you will have to prove this under when making applications for probate and any inheritance tax reporting (even if there is no bill) as estates may therefore become using forms IHT 400 (main IHT forms) and IHT 403
Income:
- Tax year in which gifts made (for example, 6 Apr 2005 to 5 Apr 2006)
- Salary
- Pensions
- Interest (including PEPs and ISAs)
- Investments
- Rents
- Annuities (income element)
- Other
- Minus Income Tax paid
- = Net income
Less Expenses:
- Mortgages
- Insurance
- Household bills
- Council Tax
- Travelling costs
- Entertainment
- Holidays
- Nursing home fees
- Other
- Total expenditure
= Total Surplus Income to allow you to make unlimited gifts from normal income
D. Wedding Gifts
- Parents £5,000 each
- Grandparents = £2,000 each
- Other Relatives or Acquaintances= £1,000 on marriage
All the above are immediately outside the estate for inheritance tax and estate calculations but if you have made gifts in excess of any of the above, they may still be potentially exempt transfers (PETs).
PETS and 7 Year Rule
Gifts in excess of the above will usually be deemed as Potentially Exempt Transfers (PETS) – unless made to certain trusts or businesses. And fall outside the estate after 7 years but there is a catch were it could be 14 years. See:
PETS and 7 Year Rule: Inheritance Tax 7 Year Rule
PETS and 14 Year Rule: 7 and 14 Yr IHT Rule
