Find out if gifts to charity are exempt from Inheritance Tax, along with other situations that make you exempt or give you relief from IHT.
We will cover:
- What IHT reliefs are available
- The annual limits for tax-free cash gifts
At a glance
Firstly, there are various lifetime and death exemptions and reliefs applicable to Inheritance Tax including:
- Annual exemption.
- Spouse exemption.
- Normal expenditure out of income exemption.
- Exemption for gifts out of income.
- Business and Agricultural Property Reliefs (BPR and APR).
- Charitable donation exemptions.
You can also find out more by downloading our FREE Inheritance Tax Planning Guide.
Here are a few examples of situations which are exempt from IHT:
Spouses and civil partners
Indeed, lifetime and death transfers between UK domiciled spouses/civil partners are exempt from IHT.
There are special rules and restrictions that affect non-domiciled spouses or civil partners.
- A non-UK domiciled spouse can make an election to become UK domiciled for IHT purposes only.
- A non-UK domiciled individual is exempt from IHT on non-UK assets unless they make a spousal election.
- Before April 2017 a non-UK domiciled individual became ‘deemed’ as UK domiciled if resident in the UK for 17 out of 20 years.
From April 2017:
- The number of years of UK residence to apply for deemed domicile to be applicable is reduced to 15 out of the previous 20 years.
- Individuals will also be deemed domiciled in certain other circumstances especially if they have a UK domicile of origin.
Certain gifts are exempt from IHT, they include lifetime gifts and bequests i.e. gifts on death made to certain organisations including:
- Qualifying charities (UK or EU).
- Community Amateur Sports Clubs (CASCs).
- Gifts for national purposes to qualifying bodies e.g. the National Gallery, National Trust etc.
- Gifts to political parties are subject to the strict condition of s.24 IHTA 1984. See the Court of Appeal decision in Arron Banks v HMRC  EWCA Civ 1439.
Lifetime exemptions for gifts of non-business assets
It is possible to make gifts during a lifetime that are exempt from IHT, they do not use the nil rate band and they are not Potentially Exempt Transfers PETs (see below). Some of these are annual exemptions meaning that, for example, you can make a small gift of £250 to the same person every year and it will be exempt.
|Annual exemption, per year, if all or part has not been used in the previous year, one year may be carried forward||£3,000|
|Small gift exemption, per person||£250|
|Gifts on marriage/civil partnership:|
|By Others, Aunt, family friend etc||£1,000|
|Exemption for regular gifts out of income||No limit|
Lifetime exemptions also include regular gifts out of income.
Potentially Exempt Transfers (PETs)
Other gifts are taxable if the transferor dies within seven years of making the gift. The death charge is calculated as follows:
|Reduced charge on other gifts made within seven years of death|
|Years before death||% of death charge|
Where IHT is due because a PET has failed, the tax is due by the done unless the deceased’s will says otherwise.
- The nil rate band is allocated to failed PET’s first and is only then available to the rest of the estate if the value of failed PETs is below the limit.
- When reviewing the availability of the nil rate band for use against failed PETs on death, any chargeable lifetime transfers, e.g. transfers into trust, made in the seven years prior to the PET and not the death, must be taken into account. This is known as the 14-year rule.
Reliefs from IHT
Business Property Relief (BPR)
Business Property Relief provides relief from Inheritance Tax on the transfer of relevant business assets at a rate of 50% or 100%. You must hold relevant property for at least two years in order to qualify for relief.
Agricultural Property Relief (APR)
Agricultural Property Relief is given on the agricultural value of agricultural property which has been:
- Occupied by the owner for the purposes of agriculture for two years ending with the date of the transfer (death).
- Owned by them for seven years ending with that date and was throughout occupied by them or another person for the purposes of agriculture.
APR is given at two rates: 100% and 50%.
If a donation of at least 10% of the net value of the estate is made to charity the IHT rate decreases to 36%.
Beneficiaries may donate the deceased’s household and personal goods without a requirement to make a Deed of variation. The value of the donation is exempted as a charitable donation and may be included in the total in order to calculate a discount.
Donations to charity are only exempt if the charity is subject to the jurisdiction of UK courts or those of another EU member state.
Responsibility for IHT
You can pay tax within six months of the end of the month of death, e.g. a death in December 2019 will mean the IHT must be paid by 30 June 2020.
- Under s.200(1) IHTA the deceased’s personal representatives or executors are responsible for settling the IHT of the estate. This was confirmed in the case of Glyne T Harris as personal representative of Helena Norma McDonald (deceased) v HMRC  TC06448 where the personal representative was held personally liable despite having distributed all assets of the estate to a beneficiary under the will.
- Where there have been PETs within seven years of death and tax is due on death it is the recipients of the PET’s who are liable for the tax.
Capital Gains Tax (CGT)
You should not overlook Capital Gains Tax when gifting assets. A gift is a CGT disposal at market value.
There are many ways to get IHT relief and situations in which you are exempt. Study these carefully before making any financial decision. If you don’t know what to do next, contact the Tax Experts!
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Kind regards Ilyas