Technical refresher - Inheritance tax exemptions

Technical Connection provides a reminder of the inheritance tax exemptions

Historically, the inheritance tax (IHT) nil rate band increased on an annual basis. However, since 2009/2010 it has been capped at £325,000 and is expected to remain at this level until 2025/2026. With this being the case, more estates will be subject to IHT, so planning in this area should be considered.  

Generally, any IHT planning will depend on the client’s asset class. However, it is often the case that many clients do not make full use of the exemptions available to them.

The starting point for anyone who is wishing to carry out IHT planning is to consider using their IHT exemptions, the most common ones being:

• Annual exemption – each individual can give away £3,000 each tax year and they can use the previous tax year’s exemption if not already used, but only once the current year’s exemption has been used.
• Small gifts exemption – up to £250 can be given to any number of individuals (note this exemption cannot be combined with any other exemption in favour of the same person).
• Gifts in consideration of marriage/civil partnership – £5,000 if the donor is a parent of one of the parties to the marriage/civil partnership, £2,500 if the donor is one of the parties to the marriage/civil partnership or a grandparent and £1,000 for any other gift.
• Unlimited gifts to registered charities, political parties or for national benefit.
• Normal expenditure out of income – to qualify for this exemption the donor must show that:      

o the transfer was part of their normal expenditure;      

o taking one year with another it was made out of income; and      

o after the gift the donor was left with sufficient income to maintain his or her usual standard of living.

Planning in this area is often overlooked, with few clients using these exemptions to the full potential – over time, regular use of these exemptions can result in large IHT savings. For example, someone who has made use of their annual exemption for, say, 25 years would have gifted £75,000 free of IHT, which in turn would have saved them £30,000 in tax.

Generally, of course, it may also be possible for clients to make other lifetime gifts, whether outright to another individual or by executing a trust, without incurring an immediate IHT charge. And clients who have inherited assets within the last two years could also consider entering into a deed of variation.

Individuals can also consider investing in assets that qualify for business relief, provided this is in line with their risk profile. Under current legislation, provided shares have been held for at least two years and the shares are in a qualifying unquoted trading company, they will attract 100% business relief and thus save 40% IHT on death.

Overall, there are numerous options available when it comes to IHT planning and what may or may not be suitable for your clients will very much depend on their overall objectives.

Technical Connection

Image credit | Ikon