Some transfers of value are exempt from IHT and this article aims to highlight these. Read on to find out more.
No tax is particularly liked by the taxpayer but it is fair to say IHT is amongst the most hated. Certain transfers of value are however exempt from IHT, such as:
(i) Transfers of value between spouses or civil partners are exempt from inheritance tax. There is a restriction if the transferor is domiciled in the UK but the transferor’s spouse or civil partner is not so domiciled. This ‘domiciliary gift limit’ is £325,000.
(ii) Annual exemption of £3,000
Transfers of value during the lifetime of a person up to a total of £3,000 per fiscal year are exempt from inheritance tax. If the gifts (if any) fall short of the above limit, the shortfall is carried forward to the following year and added to the allowance for that year. If the gift(s) exceed the limit, the excess must:
if the gifts were made on different days, be attributed, so far as possible, to a later rather than an earlier transfer; and
if the gifts were made on the same day, be attributed to them in proportion to the values transferred by them.
(iii) Small gifts to same person (no more than £250)
Transfers of value during the lifetime of a person up to a total of £250 per fiscal year to any one person are exempt from inheritance tax. This exemption is in addition to the annual exemption of £3,000 referred to above. It applies to any number of gifts up to £250 to separate persons but cannot be used to cover part of a larger gift.
(iv) Gifts in consideration of marriage or civil partnership
Gifts in consideration of any one marriage or civil partnership by any one transferor are exempt from inheritance tax on the value transferred without tax up to the following limits:
£5,000 by a parent of either party to the marriage or civil partnership
£2,500 by one party to the marriage or civil partnership to the other or by a grandparent or remoter ancestor
£1,000 in any other case.
Any excess of gifts over the above limits is attributed in proportion to the values transferred.
(v) Normal expenditure out of income
A transfer of value during lifetime is exempt if, or to the extent that, it is shown:
that it was made as part of the normal (i.e. typical or habitual) expenditure of the transferor; and
that (taking one year with another) it was made out of his income; and
that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.