Inheritance tax (IHT) is a tax on certain lifetime gifts (those into trusts) and your estate at death. Gifts made within the seven years prior to death may also be brought into the value of your estate for IHT purposes. Depending on how long ago those gifts were made, they may attract ‘taper relief’ to reduce the IHT.
Currently, the first £325,000 of any estate is subject to IHT at a nil rate: the 'nil rate band'.
IHT is not payable on the first £325,000 of an estate. If an estate is valued above this threshold the IHT rate on death is 40% (subject to reliefs). The IHT rate of lifetime gifts to a trust is 20%.
There is an IHT allowance in addition to the nil rate band where you pass your main residence to your descendants. The increase in allowance for 2020/21 is £175,000.
Exemptions from IHT include:
- Estates passing to a spouse or civil partner although special rules apply to non-domiciled spouses/partners
- Gifts to registered charities, political parties and housing associations
- Gifts for national purposes and those for public benefit
- Gifts made over seven years before death – those within seven years are potentially exempt transfers
- Small gifts of up to £250 per annum to any one person (you can make multiple gifts to different persons)
- Gifts in respect of a wedding or civil partnership by a parent of one party to the marriage of up to £5,000
- Gifts in respect of a wedding or civil partnership by remoter relatives or a party to the marriage of up to £2,500
- Gifts in respect of a wedding or civil partnership by any person to a party to the marriage of up to £1,000
- Gifts out of ordinary income of any amount – the gift should not result in capital being depleted
- Assets that qualify as agricultural property, business property or woodlands
There are common ways of using these reliefs to reduce an estate for IHT purposes.
The value of your estate is the total of all assets you own. Your estate may comprise cash, savings, property, shares and other investments, business assets, chattels such as jewellery and artwork etc.
Normally IHT is paid as a lump sum directly from the value of the deceased estate.
In certain circumstances IHT can be paid in instalments, this is normally where an asset needs to be sold (property or shares) in order to afford the IHT.
Some of the most straight forward ways of minimising the exposure to IHT on the event of your death is to make gifts that qualify from statutory exemption such as small gifts or from ordinary income. These gifts can be:
- within your annual exemption
- ones that qualify for statutory reliefs such as APR
- ones that are potentially exempt transfers and surviving seven years
The problem with making gifts during a person’s lifetime is that you are no longer able to make use of or benefit from them or any income which might arise from them (specific legislation exists in respect of this). It is also worth considering the suitability of the gift for the intended recipient in particular if they are young or vulnerable.