Can different inheritance tax allowances be used to make more substantial tax-free gifts to the same person?
I am thinking of combining the £3,000 annual exemption, the £5,000 marriage gifts exemption (plus £1,000 for my son’s future wife), and the £250 small gifts exemption. I would also like to make additional gifts out of surplus income of up to a few hundred pounds a month to him. Do these IHT-free gifts require any paperwork?
Answer
While gifts made within seven years of death are usually included in the donor’s estate for inheritance tax (IHT) purposes, the exemptions mentioned here allow gifts to be made with no liability to IHT even if the donor should die within this period.
The annual exemption can be used in combination with the exemptions for marriage gifts to make a larger gift, but the £250 exemption cannot be applied to the same recipient/s. It can only be used for other individuals, where the total gift to each person does not exceed £250 in any year.
Any unused part of the £3,000 annual exemption can be carried forward one year. So if you did not make any gifts in the last tax year, then you will have an annual exemption of £6,000 available this year. The marriage gifts should be made before or at the time of the marriage, otherwise they will not qualify for the exemption.
The rules for gifts from surplus income are more complex. For these to be immediately IHT-free you must have sufficient income over that required to maintain your usual standard of living. The gifts must be made directly from that income and be “normal expenditure”, ie part of a pattern of gifts that you intend to make on a regular basis.
It is important you document your intention regarding the gifts from surplus income and also the basis for your other gifts. If you die within seven years of making the gifts, your executors will need to include them on the IHT return made on your death and claim the exemptions. It is advisable to keep good records of the gifts so it is clear which exemption is being claimed.
A blog providing UK tax information and planning ideas from John Pointon, Accountant, Business and Tax Consultant. Please send any suggestions for topics you would like to see covered to me at jpointon@gmail.com or 34 Lightley Court, Sandbach, Cheshire, CW11 4QA or phone 01270 763 466.
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