A Guide To Inheritance Tax Planning

Each individual currently has a tax-free allowance of £325,000.

Gifts between spouses or civil partners are exempt from Inheritance Tax.

You may give gifts of up to £250 per person per tax year free of Inheritance Tax. There is no limit to the number of recipients, although this exemption cannot be combined with another exemption for the same person.

Each individual may gift up to £3,000 per tax year free of Inheritance Tax. Any unused allowance may be carried forward for one tax year only.

Tax-free gifts can be made in contemplation of marriage or civil partnership:

• £5,000 from a parent
• £2,500 from a grandparent or more remote ancestor
• £1,000 from any other person

Gifts to qualifying charities are exempt from Inheritance Tax, whether made during lifetime or on death.

Regular gifts made out of surplus income may be exempt immediately, provided:

• The gifts form part of a regular pattern
• They are made from income rather than capital
• You retain sufficient income to maintain your usual standard of living

This exemption is often used to fund insurance premiums or assist family members financially.

Certain business and agricultural assets may qualify for relief from Inheritance Tax, potentially at up to 100%.

Business Property Relief (BPR)

BPR generally applies to qualifying trading business assets that have been owned for at least two years before death.

Agricultural Property Relief (APR)

APR may apply to qualifying agricultural property where ownership and occupation conditions are met. Typically:

• Owner-occupied agricultural property must be owned and occupied for agricultural purposes for at least two years; or
• Let agricultural property must usually have been owned for at least seven years

Where BPR or APR applies, it is often advisable to leave qualifying assets to non-exempt beneficiaries or trusts rather than to a spouse or civil partner, as the spouse exemption would otherwise waste the relief.

Yes. Gifts between spouses or civil partners are exempt from Inheritance Tax. Gifts to qualifying charities are also exempt, both during lifetime and on death.

You may gift up to £3,000 each tax year under the annual exemption. If you did not use the previous year’s exemption, it can be carried forward for one year only.

You may also make gifts of up to £250 per person each tax year under the small gifts exemption.

Yes. You may make lifetime gifts to family members. Depending on the amount and the exemptions available, the gift may either be immediately exempt or treated as a Potentially Exempt Transfer (PET).

A PET is a lifetime gift that becomes fully exempt from Inheritance Tax if the donor survives for seven years after making the gift.

If the donor dies within seven years, some or all of the gift may become chargeable to Inheritance Tax.

Yes. If death occurs between three and seven years after making a PET, taper relief may reduce the rate of tax payable on the gift.

Yes. Regular gifts made from surplus income may be immediately exempt from Inheritance Tax provided they:

• Are made from income rather than capital
• Form part of a regular pattern
• Do not affect your normal standard of living

Yes. Wedding and civil partnership gifts may qualify for exemption:

• £5,000 from a parent
• £2,500 from a grandparent
• £1,000 from anyone else

Any unused Nil Rate Band and Residence Nil Rate Band may potentially be transferred to the surviving spouse or civil partner, subject to the applicable rules at the time.

The Residence Nil Rate Band is an additional allowance available when a qualifying home is left to direct descendants such as children or grandchildren.

Certain business and agricultural assets may qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR), potentially reducing or eliminating any Inheritance Tax liability.

Early planning is usually the most effective approach. Making use of exemptions, lifetime gifting opportunities, trusts, and reliefs can significantly reduce future liabilities.