In this episode of the I Hate Numbers podcast, we explore "Inheritance Tax Exemptions and Reliefs." We'll explain the key elements that affect inheritance tax, including thresholds, gifts, and the importance of keeping records.

What is Inheritance Tax?

Inheritance tax began in 1986, replacing capital transfer tax. This tax applies to the transfer of capital value when an individual dies, certain lifetime gifts when the donor passes away within seven years, and some gifts taxed immediately. However, not everyone pays inheritance tax. Only estates exceeding the current threshold of £325,000, including any assets held in trust and gifts made within seven years of death, are liable for this tax.

Key Exemptions to Consider

Marriage and Civil Partnerships

Married couples and registered civil partners can increase their threshold to as much as £650,000 when the second partner dies. To achieve this, the personal representatives must transfer the unused inheritance tax threshold from the first spouse or civil partner to the surviving partner. Additionally, any assets transferred between spouses or civil partners remain free from inheritance tax. However, this exemption does not apply to assets transferred to others.

Exempt Gifts

Several exemptions allow you to avoid inheritance tax on gifts. Gifts to your spouse, UK charities, national institutions, and political parties remain exempt from inheritance tax. Wedding or civil partnership gifts can also be given tax-free: £5,000 for each parent, £2,500 for grandparents or other relatives, and £1,000 for others.

An annual exemption allows you to give up to £3,000 each tax year without inheritance tax implications. Smaller gifts of up to £250 per person per year are also allowed, but cannot be combined with other exemptions. Thoughtful planning of your gifts can reduce the taxable value of your estate significantly.

Importance of Keeping Records

Accurate record-keeping of all gifts and exemptions used is crucial. Such records assist executors or personal representatives in efficiently managing estate matters and claiming all available exemptions. Clear documentation simplifies the completion of probate forms and ensures you avoid unnecessary tax payments.

Conclusion 

By understanding inheritance tax exemptions and reliefs, we make better decisions for our financial future. We encourage you to listen to the I Hate Numbers podcast for more insights on this topic and other tax matters. For more information or assistance, check out the show notes to book a call with us.

Until next week, happy planning!

Last week, inheritance tax was the topic of conversation. Just the sort of topic you'll bring up at any dinner party in any sort of friendly environment, and this week I'm going to continue that conversation in episode 236 of the I Hate Numbers podcast. In this podcast, I’m going to explain the background to inheritance tax, when it came about, we're going to be talking about the threshold for exemption, we're going to be talking about gifts that you can make that are exempt.

We're going to talk about marriage, yep, stay tuned for that a bit. And we're going to talk about small gifts, insurance policies, and also the importance of keeping records. Let's take a breath, let's crack on with the podcast.

Inheritance tax was introduced way back in 1986, it was a tax to replace capital transfer tax. And it's important to remember that inheritance tax is a transfer of value, a transfer of capital value. It's applicable on the death of an individual, on lifetime gifts where the donor dies within seven years of making that gift, and it's also applicable on some lifetime gifts, which can be taxed immediately.

Now, not everybody pays inheritance tax. It's only due if your estate, including any assets that you hold in trust and gifts made within seven years of your death, is valued over the current inheritance tax threshold. Worth noting, by the way, that the threshold, currently 325,000 pounds for each individual, was the same level in 2008/2009, and it's frozen at that level up until 2028.

Interesting to note, by the way, that since that threshold was up slightly in 2008/2009, it hasn't moved, and assuming a 3 percent inflation rate over a 15-year period, in real terms that threshold is actually only worth about 208,000 pounds. If it was indexed linked with an average rate of inflation of three percent up to 2024, that would have been upgraded to 506,000.

Now, tax is currently payable at the rate of forty percent on the amount over this threshold. Let's have a look at married couples and civil partners where that allowance can actually be increased. Now married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies to as much as 650,000 pounds, and that rate is applicable up to and including 5th of April 2028.

The executives of the estate or the personal representatives must transfer the first spouse or civil partner's unused inheritance tax threshold or nil rate band if you prefer that term. The executives or personal representatives must transfer the first spouse or civil partner's unused inheritance

tax threshold or nil rate band to the second spouse or civil partner when they die. Worth noting folks, by the way, that if you give assets away to anyone but your spouse on point of death, then that will gobble up and use up some of that allowance. Also worth noting that assets transferred between husband and wife or between people in a civil partnership are inheritance tax-free.

Now what are some of the gifts that are exempt from inheritance tax? As has been mentioned earlier, if your estate is worth more than the IHT threshold, 325,000 pounds, what are the gifts that are exempt from your inheritance tax? If your estate is worth more than the IHT threshold, apologies for the acronym, 325,000 pounds for the 24/25 tax year onwards, there are some important IHT exemptions that allow you to make gifts to others and not have to pay tax on them when you die.

There's something called exempt beneficiaries or donees, and you can make certain gifts to these people or organisations without having to pay any IHT. IHT, by the way, you've probably figured out folks, is inheritance tax. IHT is, for me, much easier to say and less long-winded. Now these gifts are exempt whether you make them during your lifetime or as part of your will.

You can make exempt gifts to the following: your husband, wife, or civil partner, as long as they've got a permanent home in the UK, UK charities, some national institutions such as museums, universities, and the National Trust, also UK political parties. Now gifts that you give to your unmarried partner or a partner that you are not in a registered civil partnership with are not exempt.

Now this is not me saying that as an argument for getting married, but certainly it's a consideration, nevertheless. There are still some tax advantages to being married. Love aside. Let's talk about something called an annual exemption. Now you can give away gifts worth up to 3,000 pounds in each tax year, and these gifts will be exempt from IHT when you die.

Any allowance that you haven't used up you can carry forward any unused relief to the following year. But if you don't use that allowance in that year, the carried-over exemption expires. So use it or lose it. Now the annual exemption of 3,000 pounds per person is in addition to any other gift exemptions that may exist.

I want to talk about exempt gifts now, and one particular one that stands out is what's called the wedding gift or civil partnership ceremony gift. Now some gifts made during your lifetime are exempt from IHT because of the type of gift or the reason for making it. Wedding gifts come under that umbrella.

Now wedding or civil partnership ceremony gifts are exempt from IHT, subject to certain limits. Each parent can give their child cash or gifts worth 5,000 pounds, no IHT implication. Grandparents and other relatives can each give cash or gifts worth two and a half thousand, and anybody else connected to the couple can give cash or gifts worth a thousand pounds, and it's IHT-free.

Now it's important to note you must give the gift or make a promise to make it on or shortly before the date of the wedding or civil partnership ceremony. Making the gift after it with that and the couple not expecting that is not in consideration of marriage. One good thing about the wedding gift exemption, by the way, if you want to give a gift in excess of 5,000, the first 5,000 pounds is exempt from IHT.

That doesn't always apply to the other gift allowances. There's something called small gifts. Now you can make small gifts up to the value of 250 pounds to as many people as you like in any one tax year. So if you've got a large circle of friends and family and you want to start reducing your estate, you can make those cash gifts up to 250 for any number of people, and they're all going to drop out of your estate.

However, this is one of those allowances that you can't give a larger sum and claim the first 250 IHT free. It's all or nothing. You can't use your small gifts allowance with any other exemption when giving it to the same person. So if you decide to make a gift of four and a half thousand pounds to one individual in a year, you can only use up three thousand pounds.

You can't add in the 250 pounds itself. Remember from what was mentioned earlier, you may have some allowance as unused from a prior year or for three grand. Insurance policies and proceeds are worth noting. Now one tax strategy amongst many of giving money to your beneficiaries and avoiding inheritance tax is writing your life insurance policy, or your brokers can do it for you, writing it in trust. What that means is any proceeds that arise from the insurance policy are typically exempt from IHT, and the payout goes directly to the beneficiaries and is not considered as part of your estate. That way, you avoid, not evade, you avoid paying inheritance tax.

Talk to your insurance broker to see what needs to happen. Now the last couple of things I want to mention are what are called gifts into trust and the importance of keeping records. Now gifts into trust are generally speaking not exempt from inheritance tax. If the trust is for a disabled person, the transfer into trust counts as what's called a PET, which means there's no tax payable at the moment a gift is made.

It will be exempt from inheritance tax if you survive for seven years after making the gift. Now the reason for mentioning trust, and that's a topic in its own right, is when you give cash or value, or assets to an individual during your lifetime, it's called a PET, a Potentially Exempt Transfer. If you survive that gift for 7 years, it drops out of your estate. Happy days for everybody.

If you survive for at least 3 complete years, then each year you survive after that, the IHT is tapered or reduced by a factor of 20%. Now, if you transfer property or assets into a trust, which is not a disabled person's trust, then you have what's called a chargeable lifetime transfer. What that means in effect is if you transfer assets into a trust and it goes over the 325,000 pounds, then any excess is taxed at the half the IHT rate, i.e., 20%.

If you transfer assets into a trust below the 325, the exemption covers what you've transferred, and you have unused allowances to carry forward. Now on the date of death, when people look at the estate, in terms of what you've transferred out during your lifetime as well as what's there on the day you die,

once the IHT calculations are done and it's worked out in reality of what you owe, you will not get a refund of any tax paid on a charitable lifetime transfer. Folks, I want to conclude about the importance of keeping records. Now, keeping records is not just important in your accounts and running your business, but it's also important in most things we do in our life, where it has an impact with tax.

Now it's going to help your executor or personal representative who's sorting out your financial affairs when you die if you keep any record of gifts that you make and note on the record which exemption you've used. If you don't necessarily know what that is, make sure you've got a diary or something that recalls the gifts that you've made.

It becomes much easier to evidence when you have to do the probate forms, and it makes it much easier to make sure you're claiming the maximum allowances. It's also a good idea, by the way, to keep an eye out here and a record of your after-tax income, especially if you're making regular gifts of income.

Folks, I hope you found this useful. If you'd like some more information or you'd like a conversation about how we can help you in your IHT or general tax planning, then check out the show notes for a contact, book a call. If you're already looked after, that's fantastic. Go and speak to your advisor and see what they can do to help you.

Until next week, happy IHT planning. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.