Gifts made under the normal expenditure exemption have to be:
- Habitual, ie, there must be a clear intention to be regular
- Out of income
- Not adversely affect the donor’s standard of living
For life assurance, the premiums have to be paid regularly.
Gifts Into Trusts
Gifts into trusts (except bare and disabled) are Chargeable Lifetime Transfers; other gifts are Potentially Exempt Transfers.
Gifts With Reservation
If the donor retains a benefit from the gift on the death, it will be included in their estate and the value will be on death – not when it was gifted.
Capital Gains Tax and Inheritance Tax Example
Amelia gave her holiday cottage to her children in 1997 when it was worth £65,000 and continues to use it for long periods of time. When she dies it is valued at £365,000. This is the likely outcome under current legislation:
- A gift is a Capital Gains Tax disposal and so there would be a Capital Gains Tax liability.
- Because it is a gift with reservation, Karen’s executor would take the value of £365,000 for Inheritance Tax purposes. If Karen had paid market-rate rent when staying there, it would be classed as a Potentially Exempt Transfer and not liable for IHT as it has been more than seven years since the gift was made.
Loss to Estate Inheritance Tax Example Gift Example
Desmond owns an antique chair collection comprising six chairs valued at £20,000. Four chairs are valued at £12,000 and two chairs are valued at £2,000. What would be the value of four of them if he gifts them to his grandson?
The answer is £18,000 because the loss to the estate is £2,000 by taking two chairs away.
Taper Relief Applies To Chargeable Lifetime Transfers On Death
The following is an example of the charges applied when putting money into a Discretionary Trust:
Bert puts £500,000 into a Discretionary Trust.
He will pay 20% Chargeable Lifetime Transfer (20%) on the amount in excess of the Nil Rate Band (which is currently £325,000).
£500,000 – £325,000 = £175,000.
£175,000 x 20% = £35,000
Bert dies four years later and so the £175,000 is now liable to Inheritance Tax. However, there are two factors that need to be taken into account:
- Bert has already paid 20% Chargeable Lifetime Transfer
- Because Bert died more than three years after the money was placed into the Dicsretionary Trust, taper relief is applicable.
The Inheritance Tax calculation is therefore:
£175,000 x 40% = £70,000
£70,000 – £35,000 (Lifetime Transfer amount) = £35,000
£35,000 x 32% = £11,200.
The rate of 32% is the inheritance tax rate after gifts have been applied between three and four years.
Leftover annual exemption
Leftover annual exemption can be carried over from each tax year to the next, but the maximum exemption is currently £6,000.