Ground rules on gifts - inheritance tax myth-busters
Many of us want to give some of our assets to loved ones, but inheritance tax (IHT) rules can be confusing. Here we clear up five common misunderstandings.
Updated 6 January 2021
I can give everything away and my beneficiaries won’t need to pay inheritance tax (IHT), as I won’t own anything when I die.
If only that were true! Actually you can give away as much as you like to individuals with no immediate IHT liability. There may be a liability if you die within seven years; but there are a number of exemptions, and reliefs for business and agricultural property. But If you’re giving ‘chargeable assets’ like shares or land, there may be a capital gains tax liability. Here are some points to bear in mind:
- Gifts into trust or to a company can involve an immediate IHT liability, sometimes with more payable if you die within seven years.
- Gifts and bequests to a spouse or civil partner are wholly exempt (unless the recipient is not UK domiciled and the donor is).
- Gifts and bequests to bodies such as charities and certain UK political parties are generally exempt from IHT.
The Office of Tax Simplification has reported on possible changes to the IHT regime, particularly as regards lifetime gifts, but there is not yet any sign that they will be implemented.
I’m only allowed to give away £3,000 a year.
You’re allowed to give away as much as you like, but only £3,000 a year will be covered by the annual exemption. This is an annual exemption for gifts to anyone. The unused part of this £3,000 exemption can be carried forward, for one tax year only. Otherwise you can give whatever you like, but with the tax consequences mentioned above.
I can give a share in my home to my unmarried daughter and there will be no IHT to pay.
If you both live there and you meet your share of the running costs, then it’s not regarded as a gift subject to a reservation of benefit (GROB), which would have meant that it was still deemed part of your estate for IHT purposes. But if your daughter moves out it would then become a GROB and would be subject to IHT.
There will be no IHT to pay if I give my home to my children, but they let me continue to live there and I survive for at least seven years.
Unfortunately, unless you pay a market rent, the home will continue to be treated as part of your estate for IHT purposes. This is because it would be regarded as a GROB.
I don’t need a will as everything will go to my wife or partner and there will be no IHT.
This is only partly right as there are different rules for married and unmarried partners. Firstly, unmarried partners enjoy no IHT exemption – yet. Secondly, the exemption is limited if the recipient is not domiciled in the UK for IHT purposes but the transferor is. Then the total exemption (including that for lifetime gifts between spouses) is only a cumulative £325,000. Where this is relevant, it may be worth the recipient considering the merit of electing to be treated as UK domiciled.
In either case, you do need a will for the following reasons:
- To make sure the right people benefit
- To ensure the wrong ones don’t
- To avoid arguments after you’re gone
- To minimise IHT
If you don’t have a properly executed will, your estate will pass in accordance with the law of intestacy in England and Wales; and possibly in accordance with the forced heirship law of another country if you own any assets abroad or are domiciled outside the UK (or in Scotland). Typically, in an intestacy, part of your estate – sometimes all – will go to a surviving spouse or civil partner, even if you have separated. A properly drafted will avoids this.
Conversely, if you and your partner aren’t married or in a civil partnership, the intestacy laws alone are unlikely to give the survivor any right to your estate. He or she may succeed in a claim as a dependant under the Inheritance (Provision for Family and Dependants) Act 1975, for example, but this is complicated and uncertain. A properly drafted will avoids this problem.
Inheritance tax: a round up of the key facts
On death, individuals are taxed at a rate of 40% on all of their assets above a threshold.
This nil rate band threshold is currently £325,000, together with a residence nil-rate band (RNRB). It applies if you give your home to children, grandchildren, etc, but is tapered down if your estate exceeds £2 million.
The RNRB was £100,000 for a death in 2017/18, was £125,000 for a death in 2018/19, is £150,000 for a death in 2019-20, and will be £175,000 for a death after 5 April 2020.
Can we help?
In times like these, with asset values depressed, you might be able to give away more assets than you could have in the past. Only do so though if you can afford it, and after taking advice as to the tax implications. For more details and guidance speak with your usual Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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