The current Inheritance Tax limit is £325,000 per person. This is the amount that can be passed on free of IHT as a tax-free threshold. An additional Inheritance Tax main residence nil-rate band (RNRB) will also be introduced from next year.
On top of this allowance, gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as Potentially Exempt Transfers (PETs). These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the IHT position is as if the gift was made on death.
A tapered relief is available if death occurs between three and seven years after the gift is made. There are insurance products such as a seven-year term assurance policy that can be used to reduce the amount of IHT due should the taxpayer pass away within seven years of making a gift. Obviously, there will be an additional cost associated with such insurance policies.
The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned. A common example is a person giving their house away but continuing to live in it rent-free. Such gifts are known as ‘gifts with a reservation of benefit’.
HMRC does not accept that a true gift has been made so the ‘gift’ remains subject to IHT even if the taxpayer dies more than 7 years later. These rules can be even more complicated if a trust has been established. We would be happy to advise those with existing trusts and those considering setting up trusts on the best way forward.