Blog article by Steve Baker – Financial Consultants
I was asked to explain to a client how lifetime gifts work to help mitigate inheritance tax (IHT), so here are some pointers.
The rate of tax on life time transfers is 20% as opposed to 40% payable post mortem.
This can be a very complex area and if this is of interest you may need more advice/guidance so please feel free to contact me.
The way a PET works is the donor (person making the gift) has to live for a full 7 years for it to be fully tax free, and it utilises taper relief so if death occurs at some point within the 7 year period a reducing amount of the tax due is paid on the follow in scale.
0-3 years 100%
Years 3-4 80%
Year 4-5 60%
Year 5-6 40%
Year 6-7 20%
Year 8 – onwards 0%
The above works on any gift up to the current nil rate band (NRB) of £325000, any part of the gift above this figure is immediately chargeable at 20% with a further 20% at risk if death occurs within the 7 years.
Also please bear in mind that for 7 years any gifts use up that part of the nil rate band, for example if you gifted £100000 for 7 years your NRB would be reduced to £225000.
You do have annual gift exemption of £3000 & you can use last year’s allowance if unused doubling it to £6000.
You also have a small gift exemption of £250 you can do as many of these as you wish (but not to the same person!).
Gifts to charities are IHT free.
You can also make gifts in consideration of Marriage to a child of £5000 per parent or £2500 to a grandchild per grand parent or £1000 to anyone else.
If someone is old or in ill health and 7 years is not an option there are ways of investing into investments which benefit from Business Property Relief (BPR) and it is IHT free after 2 years, plus it is transferable to a spouse and the 2 year clock is still ticking so no loss of time.