Like it or not Inheritance Tax (IHT) is here to stay. It’s been around for decades and is colloquially known as “Death Duties”. It is a tax on the value of your estate when you die.
The rules relating to IHT have changed considerably since 2007. Effectively now the threshold at which IHT is chargeable on the estate of a “typical” couple (i.e. married with children and owning a property) is £950,000 and this rises to £1,000,000 in 2020. This means the rules relating to IHT are considerably more favourable to such families than they were before 2007.
However, there is one significant exemption which is probably underused for wealthy individuals. This is the exemption for lifetime gifts made out of income. Ordinarily gifts made within 7 years of death are added back to the estate for IHT purposes. However, there are various exemptions that can be used against such gifts and one exemption applies when gifts are made regularly out of surplus income. If someone makes regular gifts to another person(s) (typically children or grandchildren) the gifts can be considered to be exempt from IHT if the donor is simply giving away spare income. This applies even if the gifts are substantial. If for example a donor had a substantial income (let’s say £80,000 per annum) and their day to day living expenses (utilities, travel, holidays, food, clothing etc) are only £50,000 per annum, then there is clearly a £30,000 surplus each year. If the donor gives away that sum each year by regular giving then those gifts are exempt from IHT on death.
It is important for wealthier donors to be aware of this and make use of such exemptions. They should keep a record of the gifts to assist their Executors in claiming the exemption after death.
There is no substitute for obtaining up to date advice on this subject. Please therefore contact any of the following who will be able to assist.