A. The transfer of assets by way of gift is divided into 3 categories :-
1. Exempt Transfers – these are gifts that are not liable to IHT as detailed below.
2. Potentially Exempt Transfers (PETs) – these are gifts where no IHT is due at the time of the gift but may become payable at some time in the future – for instance where the person making the gift (the donor) dies within 7 years. If this happens the PET becomes a Chargeable Transfer. If the donor survives 7 years from the date of the gift it becomes an Exempt Transfer.
3. Chargeable Transfers – these are gifts that are, or have become, liable to IHT and include transfer on death, transfers into and from Discretionary Trusts, and failed PETs following a donor’s death within 7 years
At present there are a number of exempt transfers which do not attract a liability to IHT and these may be varied in future Budgets :-
- Small Gift Allowance – where the total sum given to an individual does not exceed £250 in any tax year. If the total for any individual in any tax year exceeds £250 then the total sum counts as part of the Annual Allowance.
- Annual Allowance – where the sums given to all individuals in any tax year (other than those falling under the Small Gift Allowance) do not exceed a total of £3000. Once gifts made in any tax year exceed this figure they are regarded as being PETs and 7 years will need to elapse before they become Exempt Transfers. However if the Annual Allowance is not used in a tax year then it can be carried forward for one year only. For example if no gifts (other than small gifts) were made in tax year 2015/2016 then £6000 is available to be used as the Annual Allowance for 2016/2017.
- Marriage Allowance – where gifts are made to a person when they marry there is a one-off additional allowance available the amount of which depends on how closely you are related. If you are a parent to one of the parties marrying the allowance is £5000, if a grandparent £2500, and if any other relation £1000. This does not count towards the Annual Allowance but to be valid must not be made after the marriage.
- Spouse Relief – any gifts to a legally married spouse (or civil partner) on death or during lifetime are exempt regardless of amount.
- Charity Relief – any gifts to a U.K. registered charity on death or during lifetime are exempt regardless of amount. This also applies to gifts to U.K. political parties.
- Gifts out of Income – where it can be shown, to the satisfaction of the Capital Taxes Office, that gifts were made on a regular basis out of income and that this had no detrimental effect to the donor’s usual standard of living then these gifts will be treated as exempt regardless of the amount. The onus of satisfying the Capital Taxes Office will usually fall upon the Executors or Administrators on the death of the donor and each case is looked at individually so no figures can be provided as to what is acceptable and what is not. It is important that detailed records be kept to evidence a claim for this relief.
- Agricultural & Business Property Relief – this gives either 50% or 100% relief on certain assets subject to certain conditions being met. This is a very specialised area which requires professional help.