Reducing the value of your estate through strategic gifting is a cornerstone of effective inheritance tax (IHT) planning. By understanding and utilising Potentially Exempt Transfers (PETs), Chargeable Lifetime Transfers (CLTs), and other gifting strategies, you can significantly mitigate the IHT burden on your estate, ensuring that more of your wealth is passed on to your loved ones. Let's take a closer look at the mechanisms of Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs), understand their tax consequences, examine the importance of gifts in estate planning regarding Inheritance Tax (IHT), and explore the implications of inheritance tax on gifts.
Definition and Operation:
PETs are gifts made during your lifetime to individuals (not to a trust or company) that could potentially be exempt from IHT if you survive for seven years after making the gift. Common examples include giving a cash sum to a child or transferring ownership of a property to a family member.
Tax Implications:
CLTs are gifts made during your lifetime that immediately incur IHT because they are made to certain trusts or companies. Unlike PETs, CLTs can trigger an immediate IHT charge if the combined value of the gift and any other CLTs made in the previous seven years exceeds the nil-rate band (£325,000 as of the last update).
Annual Exemption: Each individual has an annual gifting allowance of £3,000 that does not count towards the estate for IHT purposes. This allowance can be carried forward one year if not fully used.
Small Gifts: You can give as many gifts of up to £250 per person per year as you like without them being added to your estate for IHT purposes, provided you haven’t used another exemption on the same person.
Wedding Gifts: Gifts in consideration of a wedding or civil partnership can be exempt up to certain amounts, depending on your relationship to the recipient (e.g., £5,000 for a child, £2,500 for a grandchild).
IHT Gifts out of Income (gifts out of normal expenditure): Regular gifts made from your income (not your capital) that do not affect your standard of living can be exempt from IHT. This requires careful documentation to prove that these gifts are indeed from income and are part of a regular pattern.
Gifts to Spouses and Charities: Inheritance gifts to your UK-domiciled spouse or civil partner are exempt from IHT, as are gifts to registered charities. These can be made at any time and are not subject to the seven-year rule.
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Yes, gifts to your UK-domiciled spouse or civil partner are fully exempt from IHT. Similarly, gifts to registered charities are also exempt and can be made at any time without being subject to the seven-year rule.
Yes, gifts in consideration of a wedding or civil partnership can be exempt up to certain amounts, depending on your relationship to the recipient. For example, you can gift £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else.
CLTs up to the nil-rate band are not immediately taxable but reduce the available nil-rate band for seven years, potentially affecting IHT on later gifts or on your estate at death. For CLTs above the nil-rate band, IHT is charged at a lifetime rate of 20%. If the donor dies within seven years and the total value of the CLTs and the estate exceeds the nil-rate band at that time, an additional 20% may be due.
Continuum Wealth offers personalised advice on using gifts to reduce IHT liability effectively. Our advisers can help you understand the rules around PETs, CLTs, and other exemptions, ensuring that your estate planning strategy maximises the benefit to your beneficiaries while minimising the tax burden. Contact us today to learn more about how we can assist with your IHT planning needs.
Feel free to reach out to Continuum Wealth for detailed guidance on making gifts as part of your inheritance tax planning strategy. Our experts are here to help you navigate the complexities of IHT and ensure your estate is managed according to your wishes.
Keeping detailed records of all gifts made during your lifetime is essential for IHT planning. Include information on the date of the gift, the recipient, the amount or value of the gift, and any conditions attached. This documentation will be important for your executors to calculate IHT accurately.
Taper relief reduces the amount of IHT payable on PETs if you die within seven years of making the gift. The relief applies on a sliding scale:
Gifts out of income are regular gifts made from your income (not your capital) that do not affect your standard of living. These can be exempt from IHT if you can prove they are part of your normal expenditure. Proper documentation is required to show that these gifts are indeed from income and are part of a regular pattern.
You can give as many gifts of up to £250 per person per year as you like without them being added to your estate for IHT purposes, provided you haven’t used another exemption on the same person.
If you die within seven years of making a PET, the gift is included in your estate for IHT purposes. The tax on the gift is subject to taper relief, which reduces the IHT rate on a sliding scale depending on how long you survive after making the gift. The rates decrease from 40% if you die within three years of making the gift, down to 8% if you die between six and seven years after the gift.
A Chargeable Lifetime Transfer (CLT) is a gift made during your lifetime to certain trusts or companies that immediately incurs IHT if the combined value of the gift and any other CLTs made in the previous seven years exceeds the nil-rate band (£325,000 as of the last update).
A Potentially Exempt Transfer (PET) is a gift made during your lifetime to an individual that can be exempt from Inheritance Tax (IHT) if you survive for seven years after making the gift. Common examples include giving a cash sum to a child or transferring ownership of property to a family member.
Each individual has an annual gifting allowance of £3,000 that does not count towards the estate for IHT purposes. This allowance can be carried forward one year if not fully used.
Note: This page is for information purposes only and should not be considered as financial advice. Always consult an Independent Financial Adviser for personalised financial advice tailored to your individual circumstances.