Inheritance TaxMay 3 2017

Making gift inheritance tax efficient

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Making gift inheritance tax efficient

IHT is considered by many to be an unfair tax, and some would go as far to say it is a form of double taxation. An individual builds up wealth during their lifetime, on which they would have paid tax on, only for that wealth to be assessed to further taxation on death.

With early lifetime planning and taking advantage of the various IHT exemptions and reliefs, an individual can reduce their exposure to IHT, increasing the amount that is available to pass on to their beneficiaries on death.

Potentially exempt transfer

An outright gift to an individual during a person’s lifetime will be regarded as a potentially exempt transfer (Pet), to the extent it does not fall within one of the exemptions (see below). However, it is important to note that transfers between spouses are generally exempt.

Where a Pet is made, no IHT is immediately due and the gift will be exempt if the individual survives seven years from the date of the gift.  If the individual dies within the seven-year period, the gift would form part of their estate for calculating the IHT due. If the individual dies more than three years after the gift, the rate of IHT is reduced (or tapered) by 8 per cent each year, until the seventh year when it is nil.

Immediately exempt transfers

There are several exemptions in relation to lifetime gifts whereby the gift is immediately exempt that is, the individual does not have to survive seven years for the gift to be disregarded for calculating IHT.

The main exemptions are as follows:

 Annual exemption of £3,000, where the allowance is not used in a year, it can be carried forward to the next tax year

 ‘Small’ gifts exemption of £250 to any person

 Gifts in consideration of marriage/civil partnership –

* £5,000 by a parent

* £2,500 by a grandparent or great grandparent

* £2,500 by a party to the marriage

* £1,000 by any other person

 Gifts to UK registered charities and those registered in the EU, Norway and Iceland

 Gifts to UK political parties

 Gifts for national purposes, gifts to certain national institutions, such as museums, art galleries and universities

Normal expenditure of out income exemption

In addition to the exemptions listed above, a valuable exemption applies to "gifts out of surplus income".  Gifts which meet the qualifying conditions of this exemption are immediately exempt from IHT and the individual does not need to survive seven years.

There is no set limit on the amount that can be given away, provided the gift does not exceed ‘surplus income’.

The qualifying conditions in order for the gift to fall within the exemption are as follows:

 The gift is made as part of the normal expenditure;

 Taking one year with another, the gift it is made out of surplus income (but not capital); and

 Taken together with all the transfers that form part of the individual’s normal expenditure, the individual is left with sufficient income to maintain their usual standard of living.

IHT reliefs

Business property relief (BPR) and agricultural property relief (APR) may reduce the amount chargeable to IHT by 100 per cent or 50 per cent.

BPR

Relief from IHT can be claimed in respect of certain types of businesses and business assets if they qualify as relevant business property. The relief has the effect of reducing the value of business property by either 100 per cent or 50 per cent depending on the type of property in question. The general rule is that the property must have been owned by the individual for two years before it qualifies for BPR. The types of property that qualify for BPR are summarised in Table 1:

Table 1

Type of property

 

Rate of relief

A business or interest in a business e.g. a sole-trade or share in a partnership

 

100%

Unquoted shares in a company, which includes shares traded on the Alternative Investment Market (‘AIM’) and Unlisted Securities Market (‘USM’)

 

100%

 

A controlling holding of quoted securities

 

50%

Any land, buildings, plant or machinery used wholly or mainly for a business carried on by a company of which the individual had control, or by a partnership of which the individual is a partner

 

50%

Any land, buildings, plant or machinery held in a trust and used wholly or mainly for the purpose of a business carried on by a beneficiary with an interest-in-possession

 

50%

Only certain types of businesses qualify for the relief.  Business activities do not qualify where they consist wholly or mainly of dealing in securities stocks or shares land or buildings or the making or holding of investments.  

In cases where a business has a mix of trading activities and investment activities, a quantitative test is applied to determine whether the business qualifies for BPR.  For example, if more than 50 per cent of the company’s business profits are from trading activities, the shares in the company may be regarded as relevant business property.  HMRC will often consider a number of factors to determine the percentage value of the company’s trading and investment activities.

APR

APR, much like BPR, can provide generous relief to reduce the value of agricultural property by either 100 per cent or 50 per cent. APR is given on agricultural property in the UK or the EEA, which has been occupied or owned by the individual for the necessary period (see below) for "agricultural purposes".

Agricultural property means:

•    Agricultural land or pasture;

•    Woodlands occupied with the agricultural land or pasture;

•    Buildings used in connection with the intensive rearing of livestock or fish, occupied with the agricultural land or pasture;

•    Cottages and the land of an appropriate character to the agricultural land or pasture;

•    Farmhouses and the associated land that are of a character appropriate to the agricultural land or pasture.

In order for the asset to qualify for APR, the agricultural property must have been either –

1.    Occupied by the individual for the purposes of agriculture for two years; or

2.    Owned by the individual for a period of seven years, and throughout that period, been occupied by someone else for the purposes of agriculture.

The rate of APR (100 per cent or 50 per cent) applying to the agricultural property is summarised in Table 2:

Table 2

Type of property

 

Rate of relief

Property where the individual has the right to vacant possession, or can obtain vacant possession within 24 months

 

100%

Property let on a tenancy that began on or after 1 September 1995

 

100%

 

Property where the individual does not have the right to vacant possession within 24 months

 

50%

Property let on a tenancy that began before 1 September 1995

 

50%

Nimesh Shah is a partner at Blick Rothenberg

 

Key points

An individual can reduce their exposure to IHT, using a variety of reliefs.

An outright gift to an individual during a person’s lifetime will be regarded as a potentially exempt transfer.

Relief from IHT can be claimed in respect of certain types of businesses.