March 2009
With the end of the tax year approaching (5 April), certain simple Inheritance Tax (IHT) reliefs should be considered. The concepts are straightforward - but implementation can prove tricky! The more potential donors within the family (eg parents/grandparents), the larger the amount of capital to pass to succeeding generations; potentially saving a charge arising at 40% against chargeable assets presently in the ownership of parents/grandparents.
My January article covered the Nil Rate Band (NRB), exempt from IHT, which changes each tax year. The current amount is £312k rising to £325k from 6 April 2009. 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 £624k this tax year, rising to £650k from 6 April 2009 and £700k from 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 for one year only. Thus the 2007-2008 Annual Allowance is available until 5 April 2009; a married couple (or civil partners), not having used this exemption previously, will have available £12,000 between them now with a further £6000 available from 6 April 2009 (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
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) £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; they are considered as lifetime transfers (for IHT purposes) and potentially taxable.
You may say this is all very well, but my own asset position is modest, – do I need all this planning and advice which bears a cost! Fair comment - however drawing up a flexible and tax efficient Will carries only a modest cost; in relation to the size of assets passing on death, potentially valued in thousands of pounds.
Formalities – surprisingly none! HMRC have no requirement for such gifts to be reported (at the time of gifting); however, it is sensible to maintain accurate records (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 important; for those donors that wish to claim the (unused) annual IHT allowance for year 2007-08, as the donor’s cheque must clear the recipient’s account by the 5 April 2009 deadline. The advice is – make such gifts well before the end of the tax year!
These three exemptions are straightforward – the annual £3000 allowance is modest. Over a ten year period, a couple in their late sixties can gift a total of £60,000 which otherwise would have remained in their estates; the underlying capital 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 a tax efficient manner and secure the future for grandchildren/godchildren etc.
Next month, I shall examine the normal expenditure out of income rules (an under utilised IHT relief especially by business owners); and gifts to charity.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
