Potentially Exempt Gifts and Exempt Gifts
Inheritance Tax is a burden that more and more of us are having to shoulder. Why? Well the individual Inheritance Tax nil rate band is set at a mediocre £325,000 and nearly 15 million homes in isolation are valued higher than this figure, and the excess is subject to 40% tax bill.
So how do you set about trying to minimise the impact on your loved ones. Well the good news is spouses are exempt from an inheritance charge. So this message is really directed at unmarried couples or indeed beneficiaries further down the line such as children.
7 Year Rule is classified as ‘a potentially exempt gift’ and is perhaps the most common way of reducing IHT. The gift can be of any value and it is accepted that if the gift was 7 years ago the duration was sufficient enough to show it as in fact a genuine ‘gift’ and not a last minute attempt to defraud the Government, and will therefore should be free of inheritance tax. Should the donor die during the seven year period then there will be an Inheritance Tax charge which is on a sliding decreasing scale and is illustrated by the table below:
| Gift and Death | Charge Applied | Effective IHT Charge |
| Year 1 | 100% | 40% |
| Year 2 | 100% | 40% |
| Year 3 | 100% | 40% |
| Year 4 | 80% | 32% |
| Year 5 | 60% | 24% |
| Year 6 | 40% | 16% |
| Year 7 | 20% | 8% |
| Year 8 onwards | 0% | 0% |
7 year gifts obviously require a degree of planning and should be considered is soon as the gift is no longer required by the donor.
Houses that are owned singly by the donor or on a ‘tenancy-in-common’ basis can be gifted on the same basis. If they donor continues to live there though it is unlikely to qualify as a potentially exempt gift as there is still a genuine interest in the property.
If the person is uncertain whether they will survive for 7 years it is often prudent to write a special 7 year decreasing term assurance. This is called a ‘gift inter vivos’ life policy and the amount of cover is reduces in line with the Inheritance Tax reduction over the 7 years, thus leaving the gift ‘free of taxes’ as intended. Furthermore, the gift inter vivos should be written in trust so that the proceeds are paid out instantly, if it is not it will be subject to the Probate process which could take months.
Other Inheritance Tax exemptions include gifts to charity, wedding or civil partnership gifts (subject to monetary limits), small gifts of £250 to as many individuals as you like.
There is also an annual limit of £3,000 which can be made up of one or more gifts. You can also use any unused annual exempt from the previous year.
There is also Inheritance Tax relief available to deceased owned a business, farm, woodland or National Heritage property.
Niche Will Writers & Estate Planners London | London Will Writers & Estate Planners
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