Most of the estate planning we do is to help people ensure that they are helping their descendants after they have passed. However for some people, especially those with significant assets, there are tax efficient ways (regarding things such as IHT) to help friends and family whilst they are still alive.
One way to do this is by making lifetime transfers known as Potentially Exempt Transfers. 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 three years of making the gift, then the IHT position is as if the gift was made on death.There is tapered relief if the death occurs between three and seven years after the gift is made.
One less commonly used exemption is especially relevant for wealthy taxpayers. Gifts which are made from surplus income, which do not result in a fall of the standard of living of the donor, are exempt from IHT. There is no published limit to this relief; the amount that can be given is only restricted by a taxpayer’s surplus income. This includes monthly or other regular payments to someone, regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries, regular premiums on a life insurance policy – for you or someone else. Other exempt lifetime gifts are listed below:
- annual gifts out of capital £3,000
- small gifts (per recipient) £250
- parental gift on marriage £5,000
- grandparent or party to marriage £2,500
- other gifts on marriage (per donor) £1,000
Any gifts made to a UK charity during a donor’s lifetime or in his Will are exempt from IHT. Political donations to any UK political party that has at least two members elected to the House of Commons or has one elected member but the party received at least 150,000 votes are also eligible for relief. It is also possible to make donations to certain national institutions such as museums, universities and the National Trust and benefit from relief.
Business relief (50% or 100%) can be claimed on qualifying property and buildings, or assets such as unlisted shares or machinery.
Agricultural property relief (50% or 100%) can be claimed on farming land, working farmhouses, farm workers’ cottages and barns. There is no agricultural relief for farm equipment but the equipment may qualify for business relief.
There are special reliefs for woodland timber which allow the value of the timber (but not the land on which it sits) to be exempted from an estate.
There are special rules for national heritage property and famous and important works of art. In general gifts to an unmarried partner, or a partner that is not in a registered civil partnership, are not exempt from IHT.