March 2010
With the end of the financial (tax) year approaching (5 April), certain simple Inheritance Tax (IHT) reliefs should be considered. The concepts are straightforward but – sometimes implementation can prove tricky! The greater the number of potential donors, within the family, (e.g. parents/grandparents)- the larger the amount of capital to pass to a succeeding (younger) generation; potentially saving an (IHT) charge arising at 40% against chargeable assets presently in the ownership of parents/grandparents.
The Nil Rate Band (NRB), exempt from IHT, is £325K, which will (for tax year 2010-2011) now remain unchanged @ £325k following the pre budget report announcement. Readers may recall that IHT is not payable between spouses (or registered civil partners); a couple therefore will escape IHT if combined chargeable assets do not exceed £650k- applying both for this tax year and that commencing 6 April 2010.
The Annual Allowance is £3000 per donor each tax year; if not used in a previous year it can be carried forward but for one year only. Thus the 2008-09 Annual Allowance is available until 5 April 2010; a married couple, (or civil partners) not having used this exemption previously, will have available £12,000 between them now with a further £6000 then available from 6 April 2010 (start of the new tax year).
Small Gifts exemption –applies, again in tax years, amounting to £250 for any number of recipients which could be ideal for grandchildren/ godchildren etc. It cannot be combined with the Annual Allowance above.
Wedding Gifts
Easter is a popular time for weddings: but see note below as to effective tax (IHT) timing!
Parents can give £5000, to each of their children, as a wedding or civil partnership gift. Grandparents can give £2500 and any other party (does not have to be a relative) can give £1000. Such gifts can be combined with the (IHT) Annual Allowance making a total of £22,000 exempt gifts (from one set of parents). This could assist children, starting married life, towards a deposit for house property.
On such a happy occasion there are pitfalls to avoid! Wedding gifts must be made either on, or just before, the marriage date; specific to and conditional upon the marriage /civil partnership taking place. Ideally such gifts, seeking exemption, should impose such conditions in writing.
In addition payment for the wedding is considered the parents responsibility by some but NOT by HMRC! Accordingly, any costs /gifts outside the limits set out above, are not exempt as they are considered as lifetime transfers (for IHT purposes) and potentially taxable.
Formalities – surprisingly none! HMRC have no requirement for such gifts to be reported (at the time of gifting); however it is sensible to maintain an accurate and up to date record (which will assist executors in completing formalities with HMRC on the donor’s demise).
The gift is not valid (for the purposes of claiming the IHT exemption), until the donor’s cheque has cleared through the recipient’s bank account. This is an important practicality: for those donors that wish to claim the (unused) annual IHT allowance for year 2009-10 (or the immediate preceding tax year); as the donor’s cheque must clear the recipient’s account by the 5 April 2010 deadline. The advice is –make such gifts well before the end of the tax year! (A wedding taking place over the 2010 Easter weekend would be too late for the donor’s cheque/s to be cleared through the recipient’s bank account – careful timing is all important)!
These three exemptions are straightforward – although the annual £3000 allowance is modest: over a ten year period a couple, aged in their late sixties, could gift a total of £60,000 which otherwise would have remained in their own estates; the underlying capital (asset) value then being exposed potentially to a 40% IHT charge arising on the second death.
Regularity of gifting is the key to these relatively modest gifts – later articles will illustrate how it is possible (for the recipients) of such gifts to use these in an (income) tax efficient manner - to provide a secure financial future for children /grandchildren etc.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article.
