Many of us want to give some of our assets to loved ones, but inheritance tax (IHT) rules can be confusing. Here we clear up five common misunderstandings.
Myth 1
I can give everything away and my beneficiaries won’t need to pay inheritance tax (IHT), as I won’t own anything when I die.
If only that were true! Actually, you can give away as much as you like to individuals with no immediate IHT liability. There may be a liability if you die within seven years, but there are a number of exemptions and reliefs for business and agricultural property. But if you’re giving ‘chargeable assets’ like shares or land, there may be a capital gains tax liability.
Here are some points to bear in mind:
- Gifts into a trust or to a company can involve an immediate IHT liability, sometimes with more payable if you die within seven years.
- Gifts and bequests to a spouse or civil partner are wholly exempt (unless the recipient is not UK-domiciled and the donor is).
- Gifts and bequests to bodies such as charities and certain UK political parties are generally exempt from IHT.
The recent change of government may lead to possible changes to the IHT regime, particularly regarding lifetime gifts, pensions, and reliefs – but we will have to wait to find out. The Chancellor has announced a Budget for 30 October 2024.
Myth 2
I’m only allowed to give away £3,000 a year.
You’re allowed to give away as much as you like, but only £3,000 a year will be covered by the annual exemption. This is an annual exemption for gifts to anyone. The unused part of this £3,000 exemption can only be carried forward for one tax year. Otherwise, you can give whatever you like, but with the tax consequences mentioned above.
There are also:
- small gift exemptions for up to £250 per recipient per year (although this is not in addition to the annual exempt amount given to the same person)
- gifts on the occasion of marriage/civil partnership up to £5,000, depending on your relationship with the parties and
- ‘normal expenditure out of income’ can be exempt for IHT purposes if you establish a pattern of such giving, it is paid out of surplus income and does not affect your lifestyle.
Myth 3
I can give my unmarried daughter a share in my home, and there will be no IHT to pay.
If you both live there and each meet your share of the running costs, then it’s not regarded as a gift subject to a reservation of benefit (GROB). This would have meant it was still deemed part of your estate for IHT purposes. But if your daughter moves out, it would then become a GROB and would be subject to IHT.
Myth 4
There will be no IHT to pay if I give my home to my children, but they let me continue to live there and I survive for at least seven years.
Unfortunately, unless you pay a market rent, the home will continue to be treated as part of your estate for IHT purposes. This is because it would be regarded as a GROB.
Myth 5
I don’t need a will, as everything will go to my wife or partner and there will be no IHT.
This is only partly right, as there are different rules for married (and those in civil partnerships) and unmarried partners (not in civil partnerships).
Firstly, unmarried partners enjoy no IHT exemption – yet. Secondly, the exemption is limited if the recipient is not domiciled in the UK for IHT purposes but the transferor is. Then, the total exemption (including lifetime gifts between spouses) is only a cumulative £325,000.
Where this is relevant, it may be worth the recipient considering the merit of electing to be treated as UK-domiciled.
In either case, you do need a will for the following reasons:
- To make sure the right people benefit
- To ensure the wrong ones don’t
- To avoid arguments after you’re gone
- To minimise IHT
If you don’t have a properly executed will, your estate will pass in accordance with the law of intestacy in England and Wales and possibly in accordance with the forced heirship law of another country if you own any assets abroad or are domiciled outside the UK (or in Scotland).
Typically, in an intestacy, part of your estate – sometimes all – will go to a surviving spouse or civil partner, even if you have separated. A properly drafted will avoids this.
Conversely, if you and your partner aren’t married or in a civil partnership, the intestacy laws alone are unlikely to give the survivor any right to your estate. For example, he or she may succeed in a claim as a dependant under the Inheritance (Provision for Family and Dependants) Act 1975, but this is complicated and uncertain. A properly drafted will avoids this problem.
Inheritance tax: a round-up of the key facts
Individuals are taxed at a rate of 40% on all of their assets above a threshold on death. This nil rate band threshold is currently £325,000, together with a residence nil-rate band (RNRB) of £175,000. It applies if you give your home to children, grandchildren, etc, but is tapered down if your estate exceeds £2 million.
These bands are currently frozen until April 2028. Both nil rate bands are transferable, so the second spouse/civil partner to die can use the first’s unused amounts.
Gifts to charities, museums, universities and community amateur sports clubs are exempt from IHT. Under certain circumstances, gifts to political parties can also be IHT-free.
Can we help?
In times like these, with asset values depressed, you might be able to give away more assets than you could have in the past. Only do so, though, if you can afford it – bearing in mind potential future needs and taking advice as to the tax implications.
Remember, The Chancellor has announced an Autumn Budget for 30 October 2024. This may include changes relating to inheritance tax.
For more details and guidance, please speak with your usual Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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