To give, or not to give: that is the question

Business Insights
03/04/2024

If someone dies domiciled in the UK for inheritance tax (IHT) purposes (or non-domiciled but with UK assets exposed to IHT), this is a tax that cannot be ignored.


Above the IHT free threshold of £325,000 (the "nil rate band"), IHT on the property of someone on their death is as much as 40%. There is no general exemption for assets left to children or other family members (except the "residence nil rate band" which allows someone to leave an extra GBP 175,000 to children or grandchildren if they leave their home to them), unlike gifts to a qualifying charity, or the spouse exemption which can offer a total exemption from IHT.


One can give away £3,000 cash or gifts up to this value a tax year with no IHT on death or may also make gifts worth up to £250 per person each tax year to as many people as they want.


Each tax year, one may also make gifts in consideration of marriage/civil partnership free from IHT. These can be up to £5,000 to a child, £2,500 to a grandchild/great-grandchild, or £1,000 to any other person.


If one has any excess income in a year and can prove they have enough to meet their usual living costs, they may make regular gifts from that excess income not subject to IHT.


There is also "business relief". Provided the business or asset was owned by the donor two years before making the gift, full IHT relief is available on a trading business, interest in a business or shares in an unlisted company. 50% IHT relief may otherwise be available.


There is a similar exemption for qualifying agricultural property (either 100% or 50% IHT relief depending on the type of property) where the property was owned and occupied for agricultural purposes immediately before its transfer: essentially for two years if occupied by the owner, company controlled by them or their spouse/civil partner and seven years if someone else.


Outside of the above allowances, anything someone gives away that is not to a spouse or charity will be a potentially exempt transfer ("PET"). Generally, no IHT is due on any gifts they make if they survive making them by seven years. If not, taper relief may be available to reduce IHT.


A potential IHT "trap" to watch out for is the "gift with a reservation of benefit" which is targeted at those who make a gift which would technically be a PET but for the fact that the donor has reserved a benefit.


Some of the above exemptions can be used to settle assets into a discretionary trust without an entry charge. One may also settle the £325,000 nil rate band into trust. Once assets are in the trust, they are outside the settlor's estate for IHT. Another option is a family investment company which can be used as an alternative to a trust.


Pensions are usually outside the scope of IHT and it may be worth considering life insurance.


Of course, one can also reduce the value of one's estate through spending!


By Sophie Voelcker


https://www.kingsleynapley.co.uk/insights/blogs/private-client-law-blog/relax-on-grant-on-credit-iht-rules