As we enter the traditional season of giving, and regardless of whether your loved ones have been naughty or nice, you may have at least half an eye on inheritance tax (IHT) mitigation.
Most people are familiar with the IHT annual exemption of £3,000 and the small gift exemption of £250 per recipient. Note that while the former can be set against part of a larger gift, that is not the case with the latter. If gifts to an individual in the tax year exceed £250, the small gift exemption simply will not apply.
There is also the marriage exemption: parents can gift £5,000 to the bride or groom; grandparents and great-grandparents can gift £2,500 and anyone else can gift £1,000. Strictly these gifts need to be conditioned on the marriage taking place so that if you have a “The Graduate” situation (older readers only) the gift should be returned.
Perhaps less well-known is the potentially unlimited exemption in respect of regular gifts made from surplus income. This exemption will apply provided the giver does have a surplus of income over expenditure and provided there is either a demonstrable pattern of giving over a period of years or, following the Bennett case (Bennett v IRC [1995] STC 54), the commitment to give regularly can be demonstrated. Again, older readers may remember Deeds of Covenant; nowadays the creation of a standing order in favour of the intended recipients can be equally useful in demonstrating intention.
By definition this exemption does not reduce a person’s capital base, but it may be useful in preventing it from growing. The exemption is often in point where premiums are paid regularly on a policy of insurance written in trust for the beneficiaries.
If your generosity takes the form of providing holidays, trips or other facilities for family and friends, even more interesting IHT issues arise: look out for our next instalment dropping down your chimney – we mean, onto your browser.
For more information, please get in touch with your usual BKL contact or use our enquiry form.