GIVING AND INHERITANCE TAX

Part of your tax year end planning may involve making some gifts that help reduce the value of your estate with the knock-on effect of reducing inheritance tax (hopefully a long time in the future though… right?!).

Anyway, the uncertainty that Capital Gains Tax faced last year was mirrored by IHT (inheritance tax). That too had been subject to a review by the OTS (Office of Tax Simplification … yes it does sound like something from a Peter Sellers sketch) commissioned in January 2018, which had seemingly got lost in the Chancellor’s in-tray. Thankfully, after nearly four years, the end of November 2021 saw a statement confirming that there would be only one administrative change to IHT (first announced in March 2021), easing the paperwork burden for many executors. IHT year end planning is, thus, also business as usual, meaning that you should consider using the three main IHT annual exemptions:

THE ANNUAL EXEMPTION

Each tax year you can give away £3,000 free of IHT. If you did not use all the exemption in 2020/21, you can carry forward the unused element to this year (and no further), but it can only be used after you have used the current tax year’s exemption. For example, if you made no gifts in 2020/21, and you gift £4,000 in 2021/22, you will be treated as having used your full 2021/22 exemption and £1,000 from the previous tax year.

THE SMALL GIFTS EXEMPTION

You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.

THE NORMAL EXPENDITURE EXEMPTION

The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one which the OTS wanted to replace. Under the exemption, any gift – regardless of size – escapes IHT provided that:

• you make it regularly;
• it is made from your income (including ISA income, but excluding investment bond and other capital withdrawals); and
• the sum gifted does not reduce your standard of living.

This last exemption is not easy to prove. It would help your Executors and therefore your beneficiaries if you follow our guidance and requests to update your income and spending each year. Honestly, we don’t do these things to simply get you to complete forms – there is a logic and it’s all for your benefit (we do appreciate that it is a pain!). You can do this using our spending plan or simply update the information on the portal. If I have worked on your plan recently, the figures there also need to be checked. Basically we need to evidence your spending – or rather your executors will.