Don't let death tax kill the romance

27 October 2020
2020, the start of a new decade, was pitched to be a year of new beginnings for many, however, that dream was quickly quashed as the COVID-19 pandemic has led to global social and economic disruption on a scale many will have never seen in their lifetime, but it’s also brought out a nuance which many clients with estate planning at the forefront of their mind might need to be made aware of.

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 exemptioncurrently 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 giftsyou 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 incomethis 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.

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About the author

Gregor Sked

Protection Development and Technical Manager

Gregor’s exposure to financial services began back in 2011. Most of his early career was spent at Standard Life where he was a presenter in the workplace pension engagement team. He joined Royal London in 2018 to spend more time on protection in the Intermediary market. Gregor is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Gregor is also studying towards a Diploma in Financial Planning through the CII. Even though he spends most weeks travelling the length and breadth of the UK for business, in his spare time he loves travelling the world and planning future adventures. He also loves cooking, running and when he’s not travelling can be found on the golf course patching up all the divots he’s made.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.