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Wednesday, 05 July 2023 07:50

IHT - Lifetime Transfers including Potentially Exempt Transfers

Some lifetime transfers are specifically classified as exempt according to legislation and include the following:

Annual Exemption

For any tax year, the first £3,000 of lifetime transfers (taken in date order) are exempt from IHT. 

Where the annual exemption is not fully utilised in one year, it is carried forward to the next tax year only and, if not then fully utilised, it is lost. The current year exemption is always used before the brought forward exemption. 

Taxpayers should be encouraged to use their annual exemptions each year as - over the years - such exemptions are valuable in tax planning terms. 

Small Gifts 

For any tax year, small gifts to a maximum of £250 per recipient in that year are exempt transfers. There is no restriction on the number of recipients and the exemption will cover typical birthday and Christmas presents each year. 

A gift in excess of £250 does not qualify for exemption so the whole gift of £255 will be a chargeable transfer whereas a gift of £245 will be exempt. 

Normal expenditure out of income

This is a valuable exemption and is often under-utilised by taxpayers. 

A transfer of value will be an exempt transfer if - taking one year with another - it is made out of after-tax income and, taking into account all transfers of value made out of normal expenditure, the donor is left with sufficient income to maintain their usual standard of living.

The exemption is without financial limitations but does not apply to transfers of capital - this can be used, typically, by elderly taxpayers who have income in excess of their needs. 

Care is needed to ensure that certain payments will qualify as being made out of normal expenditure. 

Gifts to a spouse 

A transfer of value (a gift for example) made to a spouse is an exempt transfer and there are no financial limitations where the recipient spouse is domiciled here; otherwise such gifts are exempt up to the value of £325,000.

Gifts in consideration of marriage 

Whether a gift is an exempt gift depends on the relationship between a donor and a party to a marriage. 

Gifts can be made up to the maximum limits below and the exemptions apply to gifts made to a couple rather than to each of them individually. Where the gift is more than the maximum exemptions, the excess will be subject to IHT in the normal way. 

The main maximum exemptions apply to gifts from parents (£5,000) and from grandparents or great-grandparents (£2,500) made before the wedding, or in exceptional circumstances, after the wedding. 

Other exemptions

Gifts to charities, registered clubs, political parties and for national purposes (such as supporting Museums and National Trust) are exempt but it is recommended that advice is taken before committing funds to a particular favourite. 

Potentially Exempt Transfers (PETs) 

Gifts that are made where exemption applies by the operation of the law are exempt immediately. 

As the title suggests, certain transfers can be treated as if they are exempt but the donor must survive a full period of 7 years in order for the gifts to become fully exempt. 

A PET is a transfer by an individual to another individual or into a disabled trust and is considered to be a PET when the transfer enhances the recipient's Estate. 

It is important to keep comprehensive records of all PETs as some of these may be taken into account when calculating the IHT charge on death in certain circumstances. 

Ian Conway

 

This article was written by Ian Conway, who is a Senior Tax Manager based in our Taunton office. Ian is both FCA and CTA qualified and is also certified in Probate and Estate Administration. Ian will be pleased to respond to any questions you may have regarding Inheritance Tax or Probate Issues. Please contact him on 01823 286274 or by email This email address is being protected from spambots. You need JavaScript enabled to view it..  

Last modified on Wednesday, 05 July 2023 11:42


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