A Simple Guide to UK Inheritance Tax and Tax Efficient Gifting

The UK could be perceived to have one of the most punitive inheritance tax regimes in the world. Individuals pay a 40% rate on the value of their taxable estate above a tax free allowance of £325,000. In the case of a married couple this tax free allowance can be passed onto a surviving spouse, which means that, following their death, the estate will enjoy a £650,000 tax free allowance.

Additional Nil Rate Allowance

Individuals who died after 6 April 2017, with an estate value greater than their tax free allowance of £325,000, due to the value of their home, may pass on an additional tax free allowance. In tax year 2017 – 2018 this additional amount is £100,000 per estate.

The maximum available amount increases annually, for death in subsequent tax years, as follows:

  • £125,000 in 2018 – 2019
  • £150,000 in 2019 – 2020
  • £175,000 in 2020 – 2021

Beyond tax year 2020 – 2021, the inheritance tax threshold will increase with inflation, based on the Consumer Price Index.

Lifetime Gifts

If money is given away during an individual’s life it does not necessarily mean that the asset is then outside his estate for inheritance tax purposes. This is the case when an asset is gifted away but the donor continues to benefit from the asset. An example would be – continuing to live in a property, even if the legal title has been gifted away (this is known as retaining a benefit).

Gifts, however, made more than seven years prior to death, without the retention of a benefit, will not be included in the deceased’s estate. Any gifts made within seven years will, in most circumstances, form part of the estate.

Gift Allowances

There are certain gift allowances that can be used year on year, where the seven year rule is NOT applicable.

The six key gift options are detailed below. These options, if planned for properly across a number of years, can reduce the inheritance tax liability considerably.

Dixcart recommends that a record of all gifts made is kept with the Will.

  • Give away money each year

Each year an individual can give away up to £3,000. This gift can be to anybody or split across any number of people.

If this allowance is not used one year, it can be carried forward to give £6,000 the next year (it can only be carried forward one year).

  • Wedding presents

In addition to the annual allowance, parents can each give a wedding gift of up to £5,000 to their children. This gift allowance must be made before the ceremony.

If grandchildren marry, an individual can give up to £2,500 to each grandchild, and for friends or other relatives the wedding gift is up to £1,000 each.

  • Unlimited small gifts

An unlimited number of gifts of up to £250 each in any tax year can be made as long as they are to different people. Care needs to be taken, as anything over this sum could be classed as part of the £3,000 annual allowance. Individuals need to ensure that they have not used any other exemption for the recipient or the allowance might not apply.

  • Charitable donations

Helping good causes with monthly donations can reduce the inheritance tax bill.

Charitable gifts are free from inheritance tax. If at least one-tenth of net wealth (calculated as a percentage of the death estate) is donated, the Government has the discretion to cut an individual’s inheritance tax rate from 40% to 36%.

  • Contributing to living costs

Money used to support an elderly person, an ex-spouse, and/or a child under the age of 18 or in full-time education is not considered to be within the deceased’s estate on death, whatever amounts have been paid.

  • Payments from surplus income

An individual with surplus income should not ignore the opportunities provided by this provision. If the criteria, detailed below are met, the seven year period is not relevant. Such transfers are not deemed to be part of the taxable estate (except on death) and can therefore be exempt from inheritance tax.

Key criteria for a transfer of income to be exempt are:

  1. it was made as part of the usual expenditure of the transferor; and
  2. the transferor retains sufficient income to maintain his usual standard of living, having taken account of all the income transfers that form part of his usual expenditure.

Additional Information

If you require additional information regarding UK inheritance tax, gift allowances and/or the importance of having a UK Will, which reflects current wishes, please contact Paul Flude or Paul Webb: advice.uk@dixcart.com or speak to your usual Dixcart contact.