When is Inheritance Tax Payable When You Are Alive?

Most people think that Inheritance Tax (IHT) is a tax payable on estates over IHT nil rate bands (IHT NRB) and IHT residential nil rate bands (IHT RNRB) at a rate of 40%, although some farmers may access a 50% relief down to 20% for a short period on agricultural land and property at 20%.

IHT is not a death tax, it is a transfer of wealth tax, a gifting tax that is potentially payable not just in death put also in life.

Basic Inheritance Tax Rules

• £325,000 NRB i.e., 0% tax.  Any used allowance on death is passed to your surviving spouse or civil partner to add to their own unused IHT NRB.
• £175,000 RNRB i.e., 0% tax.  Any used allowance on death is passed to your surviving spouse or civil partner to add to their own unused IHT NRB.
• Gifts between spouses are free of IHT.
• £3,000 annual gifting exemption (+ any unused gifting allowance from the previous tax year) i.e., immediately outside your estate, 0% tax.
• £250 gift allowance.  Unlimited £250 gifts to different individuals e.g., you could walk down the high street today and gift £250 to 100 strangers if you choose to, and these gifts are immediately outside your estate, 0% tax.
• Gifts from excess normal income over normal expenditure are immediately free of inheritance tax, 0% tax.  You must be able to prove your standard of living was not reduced, you have not eroded your ‘capital’ and each tax year record of income, expenses, excess income and gifts must be given for each of the last 7 years in HMRC IHT returns/forms on death.
• There are many other IHT rules for business assets, agricultural assets, wedding gifts, charity, political parties and more.

Larger ‘One Off’ Gifts e.g., £100,000 to Individuals or Disabled Person Trusts

It is a fallacy to think you can only gift £3,000.  You can gift as much as you wish to when alive but there are rules.

• You make a gift of £100,000 to an individual e.g., your child.(this gift cannot be to a business or most trusts, it must be to individuals).
• Less £3,000 annual gift exemption = £97,000.
• 7 Year Rule:  £97,000 gift is a potentially exempt transfer (PET)
• If you die within 7 years of the date of the gift, the whole £97,000 (whilst it does not need to be refunded by the receiver) is included in your estate for IHT calculations.
• If you die after 7 years of the date of the gift, the whole £97,000 is fully outside your estate and is not included for IHT calculations.

Larger ‘Cumulative’ Gifts e.g., £100,000 every year for 5 years to Individuals or Disabled Person Trusts

It is a fallacy to think you can only gift £3,000.  You can gift as much as you wish to when alive but there are rules.

As before, each £100,000 gift is reduced by £3,000 annual exemption to leave £97,000 as a potentially exempt transfer.  Each gift is cumulative as a PET.

• Year 1 - £97,000 PET.
• Year 2 - £97,000, cumulatively £194,000 of PETS within last 7 years.
• Year 3 - £97,000, cumulatively £291,000 of PETS within last 7 years.
• Year 4 - £97,000, cumulatively £388,000 of PETS within last 7 years.
• Year 5 - £97,000, cumulatively £485,000 of PETS within last 7 years.
• If you die now, all gifts are included in your estate for IHT with the first £325,000 of gifting using up your NRB i.e., 0% tax and balance of gifts made in last 7 years £160,000 subject to a reduced value via taper relief and then taxed at 40%.
• Year 6 - £0 gift, cumulatively £485,000 of PETS within last 7 years.
• If you die now, all gifts are included in your estate for IHT with the first £325,000 of gifting using up your NRB i.e., 0% tax and balance of gifts made in last 7 years £160,000 subject to a reduced value via taper relief and then taxed at 40%.
• Year 7 - £0 gift, cumulatively £485,000 of PETS within last 7 years.
• If you die now, all gifts are included in your estate for IHT with the first £325,000 of gifting using up your NRB i.e., 0% tax and balance of gifts made in last 7 years £160,000 subject to a reduced value via taper relief and then taxed at 40%.
• Year 8 - £0 gift, under the 7-year rule, £97,000 PET in year 1 is now fully exempt from IHT and outside your estate.  Cumulatively, there are now £388,000 in PETs made with the last 7 years (years 2 to 5).
• If you die now, 4 years of gifts (£388,000) are included in your estate for IHT with the first £325,000 of gifting using up your NRB i.e., 0% tax and balance of gifts made in last 7 years £63,000 subject to a reduced value via taper relief and then taxed at 40%.
• Year 9 - £0 gift, under the 7-year rule, another £97,000 PET in year 2 is now fully exempt from IHT and outside your estate.  Cumulatively, there are now £291,000 in PETs made with the last 7 years.
• If you die now, 3 years of gifts (£291,000) are included in your estate for IHT with the first £325,000 of gifting using up your NRB i.e., 0% tax on all gifts and you still have £34,000 of NRB (£325,000 - £291,000) with the balance of your estate subject to IHT at 40% less your remaining £34,000 NRB.

Gifts to Businesses and/or Relevant Property Trusts (Most trusts but excluding disabled person trusts)

• These gifts are not potentially exempt transfers (PETs).
• These gifts are Chargeable Lifetime Transfers (CLTs).
• This means you can make cumulative gifts up to the £325,000 NRB and still pay 0% but you are using up your NRB and if you die within 7 years, the full value is again included in your estate for IHT.
• Cumulative and one off CLTs fall outside of your estate after 7 years (as with PETs above).
• If you make one off or cumulative CLTs that exceed the £325,000 NRB within 7 years, there us IHT payable on the excess CLT immediately at a rate of 20%.  IHT is payable during life as well as death.
• If you die within 7 years of the cumulative CLTs, all the CLTs wil be included in your estate with 40% payable on all with a credit for the 20% already paid on any CLTs that exceeded the NRB.
• If you die after 7 years of all cumulative CLTs, the gifts are now outside the estate but the 20% IHT already paid on excess CLTs over and above the £325,000 NRB is not recoverable.

Beware the 14 Year IHT Rule for CLTs …

You must also be careful when there is a combination of CLTs and subsequent PETs within the next 7 years and then dying within 7 years of the latter PET as this may create a 14 Year IHT rule rather than a 7 Year IHT Rule

See:  7 and 14 Yr IHT Rule

Remember, IHT is not a death tax, it is a transfer of wealth tax, a gifting tax that is potentially payable not just in death but also in life as a Chargeable Lifetime Transfer for gifts to business and most trusts which can, in some circumstances cause additional IHT even 14 years later.

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