UK inheritance tax is charged on the worldwide assets of persons domiciled in the UK and on the UK assets of non-domiciled persons. The tax is charged on certain lifetime transfers of value and on the estates of deceased persons. There is a nil rate band on transfers up to £325,000 and thereafter the charge to tax is 20% on lifetime transfers and 40% on deceased persons’ estates. Gifts between individuals are not subject to inheritance tax if they are made more than seven years before the death of the donor of the gift.
Individuals may therefore plan to ensure that they do not pay unnecessary amounts of inheritance tax, by using the nil rate band and by making gifts at a sufficiently early stage so that these gifts will not be caught by the provisions relating to gifts within seven years of death. There are of course limits to the extent to which planning can be done in this respect. However another useful part of the inheritance legislation is the number of exemptions given in various circumstances, which can also be used in a sensible way to ensure that no unnecessary liability to inheritance tax arises.
The transfer of assets between spouses or between civil partners during lifetime or on death is exempt from inheritance tax. When the spouse or civil partner to whom assets are transferred is not UK domiciled, and the transfer is from a UK domiciled spouse or civil partner, the exemption is limited to £55,000.
An annual exemption of £3,000 per tax year (which runs to 5 April) applies to lifetime transfers that are not wholly exempt from inheritance tax. When this annual exemption is not used in any tax year, it can be carried forward for one year (but no more than this) and used in the tax year that immediately follows. The exemption is applied to transfers in chronological order during the year.
There is a small gifts exemption that covers gifts up to a total of £250 to a particular person in a tax year. This would therefore cover gifts such a birthday presents. There is also an exemption for gifts to individuals “in consideration of marriage”, depending on the relationship of the giver to the parties being married. Gifts by a parent of one of the parties to the marriage are exempt up to £5,000; gifts by a lineal ancestor or by one of the parties to the marriage to the other are exempt up to £2,500; and gifts to the parties to the marriage by any other person are exempt up to £1,000. These limits apply to each particular donor for a particular marriage. The same exemptions apply in the case of a civil partnership ceremony.
Another important exemption is for normal expenditure out of income. Where a gift is made out a person’s normal expenditure from the income of a year, and the gift does not reduce the person’s income below the level needed to maintain their existing living standard, the gift is exempt from inheritance tax. This exemption would cover expenditure such as premiums on life assurance policies or pension contributions paid on behalf of another person. Such expenditure is likely to be repeated each year and this would be one indicator to the tax authorities that this exemption will apply to the income.
Gifts to charities or to registered community amateur sports clubs are also exempt from inheritance tax. The exemption applies both to outright gifts and to funds held in trust for charitable purposes or for the purposes of a sports club or sports governing body. The exemption applies both to lifetime gifts and to gifts made on death.
Gifts to political parties are exempt, whether made in lifetime or on death. This exemption applies to any political parties who at the last general election before the gift was made had two members of the party elected to the House of Commons, or had one member elected to the Commons and received in total (for all candidates of the party) at least 150,000 votes.
Certain other types of transfer are also exempt from inheritance tax when made in lifetime or on death, including gifts for national purposes and gifts of land to a registered housing association. A transfer by an individual of shares or securities in a company to a trust for the benefit of employees of the company is also exempt, subject to certain conditions.
Exemptions for heritage property
Where an individual transfers funds into a settlement that has been set up for the maintenance, repair of preservation of heritage property, a claim can be made for the transfer to be exempt from inheritance tax. The transfer is exempt if the UK Treasury makes a direction in respect of the property. The claim must be made within two years of the date of the transfer but HM Revenue and Customs (HMRC) may allow a longer period for the claim to be made.
There is also a conditional exemption relating to the transfer of property that the Treasury designates as being of pre-eminent national, scientific, historic, artistic or scenic interest, including works of art, collections or land and buildings. A claim must be made by the taxpayer within two years of the transfer of the property. The exemption applies to lifetime transfers and to transfers on death. The transferor or the transferor’s spouse (or both) must have owned the property for six years or more, except where the property was inherited by the transferor on the previous death of another person. If the conditions set by the Treasury are not kept, inheritance tax may become payable.
The Treasury will normally require an undertaking as to the maintenance of the heritage property, public access to the property and its retention in the UK (in the case of movable property). There may also be conditions relating to publicising the property.
Sources:
HMRC website www.hmrc.gov.uk
“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009