But what has this got to do with death tax? Well, for many parents, grandparents, great grandparents and even family friends with loved ones due to be married this year, the provision of a monetary gift to the happy couple will often form part of their estate planning. However, they may now, unknowingly, find that gift included in the value of their estate.
Before I explain this further, let’s remind ourselves about the main exemptions available when making gifts because gifting can be one of the most effective ways of reducing ones estate to ease the potential tax bill on death.
Annual exemption – currently worth £3,000; this is the value of gifts which can be given away each tax year without them being included in the value of the estate.
Marriage & civil partnerships – all lifetime gifts and gifts on death to a spouse or civil partner are exempt from IHT (subject to being a UK resident). This means that the unused nil rate band and residence nil rate band can be transferred and used on second death. This can give the magic million amount (two nil rate bands of £325,000 plus two residence nil rate bands of £175,000).
Small gifts – you can make gifts up to the value of £250 each year to anyone, with no limits on the number of £250 gifts that can be given, however, they mustn’t have received gifts from you in the same year, so if you’ve already gifted someone your full £3,000 annual exemption, you cannot then gift them a further £250.
Normal expenditure out of income – this is one of the lesser known ways of reducing the value of one’s estate but it can be one of the most effective, and that’s to gift money from your surplus income. This exemption is technically unlimited subject to three tests. It has to be from income not capital, it has to be regular and it can’t reduce the standard of living of the person giving the gift. It can be used for paying for school fees, pension contributions or ISA savings for children or grandchildren and so on. Another way to ‘gift’ surplus income could be to set-up a whole of life policy written under trust, not only will the benefit on claim be paid outside of the clients estate but the policy premiums, being made from surplus income will not be subject to IHT.
Charities & political parties – during your lifetime and on death you can make gifts to registered charities and political parties which won’t be included within your estate when calculating IHT. If you leave at least 10% of your estate to a registered charity upon death, the IHT tax liability will decrease to 36%.
Weddings & civil ceremonies – you can make gifts of up to £1,000 per person or £2,500 if it’s a gift to a grandchild or great-grandchild’s wedding, and £5,000 if it’s a child’s wedding.
It’s that last point which is of particular importance in light of COVID-19. IHTM14191 of the HMRC’s IHT Manual states that for a gift being made in consideration of marriage to be exempt for Inheritance Tax, it must be made:
- on or shortly before a marriage or the registration of civil partnership takes place,
- to one or both parties to the marriage or civil partnership, and
- to become fully effective when the marriage or registration of civil partnership takes place.
Yet, with many weddings being cancelled at short notice, if the gift has become fully effective before the wedding takes place, this could create an issue as the exemption would not be available. Should the donor of the gift sadly pass away within seven years of making the gift, if there is no other exemption available, the gift will be included within the value of their estate.
As people are becoming more aware of their own mortality and the impact of their estate in light of COVID-19, why not take this opportunity to talk estate planning with your clients? Ask about the family and find out if there have been any weddings cancelled where monetary gifts have been given.
And, if you’re looking to do more estate planning within your business, why not use this nuance as a conversation starter with clients? Plus we have lots and tools to support your conversations including an IHT calculator that calculates any potential IHT liability based on your client's assets and liabilities.