Coronavirus is having a profound impact on many aspects of our lives. With many people facing difficulties during these extraordinary times, providing financial assistance and support to family and friends is at the forefront of people’s thoughts. However, if careful planning is not carried out beforehand, you may find yourself inadvertently subject to an unwelcome charge to Inheritance Tax in the future.

It is, therefore, very important to consider the available allowances and exemptions prior to making any gifts.

Potentially Exempt Transfers

A ‘Potentially Exempt Transfer’, or PET, is a gift made from one individual to another. The reason such a gift is described as being ‘potentially exempt’ is because it will not attract any charge to IHT provided the individual gifting (the donor) survives seven years from the date of the gift.

As there is no limit on the size of a PET, this is a very attractive way to both reduce the value of your estate exposed to IHT on your death and potentially avoiding a charge to IHT on the gift itself. The risk is that death occurs before the ‘seven-year clock’ expires, in which case the gift is brought back into the estate and is liable to a charge to tax. Where this happens after three years have elapsed, the amount of tax payable is reduced annually by 20% due to a complex relief called ‘taper relief’.

With the Government looking to recoup some of the money that they have borrowed to fund their efforts in tackling the difficulties posed by the virus, it has been suggested that the Chancellor may be looking at sweeping changes to the IHT regime which would almost certainly include looking at PETs. It may, therefore, be sensible to consider whether it would be appropriate – having regard to your current exposure to IHT, any Capital Gains Tax implications, and affordability – to give assets away sooner rather than later in order to utilise this valuable exemption.

Registered legal partner exemption

All gifts made to your spouse or civil partner will generally be completely exempt from a charge to Inheritance Tax. There is only one limitation to this exemption which concerns any UK domiciled donor who has a legally registered partnership with an individual who is not domiciled in the UK. In this case, transfers are exempt only up to a value of £325,000.

Annual exemption

Every individual has an annual exempt allowance of £3,000 that refreshes with each new tax year. This means that you can gift up to £3,000 to anybody you choose. If you have not made any gifts in the preceding tax year, then you can ‘carry forward’ the unused allowance from that year only. It you gift more than £3,000, then the additional value will simply be treated as a PET.

Small gifts

In addition to the annual exemption, individuals are permitted to make small gifts of up to £250 to any person who has not benefitted from their annual exempt allowance. There is no limit to the number of individuals who can benefit from this exemption.

Gifts in consideration of marriage

This exemption is limited by the relationship of the donor with the recipient of the gift. Parents can gift up to £5,000, grandparents up to £2,500, and any other person up to £1,000 to an individual in consideration of their marriage. It is important that the gift is made either on or before the marriage and not after the event. If the marriage does not take place, the relief will be denied. This exemption can be used in conjunction with the annual exemption, allowing a parent to gift up to a maximum of £8,000 in consideration of their child’s marriage.

Normal expenditure out of income

This is an extremely useful exemption that is often overlooked as a method of gifting in a very tax efficient way.

Regular gifts out of an individual’s surplus income can be exempt from IHT provided certain conditions are met; namely that the transfers were made out of income (not capital) and that the donor had sufficient net income to maintain their normal standard of living after making the gifts.

To demonstrate that the expenditure is ‘normal’, it is important to establish that a settled pattern of expenditure has been adopted by the donor, or in relation to future expenditure that the donor is committed to making regular gifts out of surplus income.

To that end, it is good practice to prepare a document known as a Deed of Commitment. This Deed clearly records the income position of the donor and the commitment to making regular gifts in the future. This is very helpful when evidencing the position to HM Revenue and Customs.

There is no limit on the size of these gifts other than that the person making them can maintain a sufficient standard of living. Accordingly, this will vary from person to person depending on the size of their income.

Maintenance of the family

Payments made to support your children, the children of your registered legal partner, or any dependent relative may be exempt from a charge to IHT. This is another often overlooked exemption that can prove very useful in reducing your estate to IHT while assisting younger family members in a tax efficient way.

The exemption extends to gifts for the maintenance of a dependent child under the age of 18, or over that age if in full time education, as well as the reasonable care or maintenance of a dependent relative unable to do so themselves as a result of a disability or infirmity.

Specialist Estate Planning Solicitors, Edinburgh

Murray Beith Murray remains committed to supporting you with many of the challenges you are facing during these extraordinary circumstances. If you would like to discuss any of the issues covered here, or if you require assistance with any other estate planning matters, please complete our contact form or call us on 0131 225 1200.

Our personal, attentive service coupled with sage, astute and commercially-minded guidance, allows us to build long-term, ongoing relationships with our clients, helping them to protect assets throughout generations. Our highly personal service reflects our culture, which is centred on integrity and trust, and the expert guidance we provide has been designed to be an investment, not an expense.