This is a short guide to exemptions and reliefs that may help you to plan ahead and minimise the IHT that may be payable on your death, or even in your lifetime.
Examples of exemptions and reliefs include:
Spouse or civil partner exemption: IHT is not payable on anything you leave to a spouse or civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the tax free allowance, which is currently set at £325,000 for each individual.
Residential Nil Rate Band (RNRB): Introduced on April 6 2017 this new allowance relates to property ownership. It will be phased in between 2017 and 2020, reaching a value of £175,000 for individuals by 2020/21. This allowance is also transferable between spouses and civil partners. The property must be left to direct descendants. More information here.
Charity exemption: Any gifts you make to a ‘qualifying’ charity – during your lifetime or in your Will – will be exempt from IHT. Similar rules apply to gifts to some national institutions such as museums and universities and to any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party must have received at least 150,000 votes. A donation to charity in your Will may also reduce the rate at which tax is paid.
Potentially Exempt Transfers (PETs): If you survive for seven years after making a gift to someone, the gift is generally exempt from IHT, no matter what the value – see below for further details.
Annual exemption: You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount. You can also use your unused allowance from the previous tax year but you use the current year’s allowance first.
Small gift exemption: You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you cannot give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether. You also cannot use your small gifts allowance together with any other exemption when giving to the same person.
Wedding and civil partnership gifts: Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount. Parents can each give cash or gifts worth £5,000; Grandparents and great grandparents can each give cash or gifts worth £2,500; anyone else can give cash or gifts worth £1,000. You have to make the gift – or promise to make it – on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift – or if you make the gift after the ceremony without having promised it first – this exemption will not apply.
Regular gifts or payments that are part of your normal expenditure: Regular gifts made out of your after-tax income, not including your capital, may be exempt from IHT. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
These gifts can include:
- monthly or other regular payments to someone
- regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
- regular premiums on a life insurance policy – for you or someone else
You can also make exempt maintenance payments on this basis to:
- your husband, wife or civil partner
- your ex-spouse or former civil partner
- relatives who are dependent on you because of old age or infirmity
- your children, including adopted children and step-children, who are under 18 or in full-time education
Business, Woodland, Heritage and Farm Relief: If the deceased owned a business, farm, woodland or National Heritage property, some relief from IHT may be available.