Wrapping up rules on inheritance tax

Emma Elwess

Christmas is a time for giving, but for many farming families with the prospect of reduced subsidies and much uncertainty ahead, the idea of an expensive festive period can cause concern. However, the end of the year can also be a good time to review your overall finances, re-evaluate your estate and, and if they have not already been used, a useful way to use your annual allowances to reduce your estate for inheritance tax purposes.

Gifts of money are usually very well received, but it is important to understand the inheritance tax implications in the long run, especially if a large retrospective tax bill could upset the apple cart and put the future continuation of the farm into jeopardy.

But if you are in a fortunate position, lifetime giving can be a tax efficient way of providing financial support to loved ones. Emma Elwess, Head of Wills & Probate at Pearsons & Ward Solicitors in Malton explains how making gifts to family members can be a useful part of your annual tax planning strategy, provided you are aware of the rules.

Reducing inheritance tax

While most reliefs for farmers are straightforward, the rules on inheritance tax can be complex. Agricultural land benefits from 100 per cent relief on qualifying assets under the current inheritance tax regime, but if you have diversified your farm to include for example, furnished holiday lettings, they are treated as a trade for income tax and capital gains tax purposes but are not eligible for business or agricultural property relief, which means that they could be subject to inheritance tax.

There is no inheritance tax payable on the first £325,000 of your estate when you die, but the tax will be charged at 40 per cent on everything above that amount if it does not qualify for agricultural or business property relief as above. So, it is important to work with us as your solicitor to find the best ways of reducing the size of your estate to reduce the amount of inheritance tax that your family will have to pay when you die.

One way of doing this, which is particularly useful at this time of year, is by making lifetime gifts. These can be an effective way of reducing the value of your estate, but they must fall within certain exemptions.

Annual exemption

Each year, you can make a gift of £3,000 without it later incurring inheritance tax and this allowance can be carried forward one tax year if you do not use it. This means you and your partner together could gift your children or grandchildren £6,000 this year, or £12,000 if you did not use last year's allowance. If you are feeling particularly generous, the annual allowance can also be used to exempt the first £3,000 of a larger gift.

Small gifts

You can make individual gifts of up to £250 per person each year to as many people as you like, provided you have not already used another exemption on gifts to those people. This is a useful way of making small Christmas gifts to children and grandchildren.

Regular gifts from income

Another way of making gifts without incurring inheritance tax is to make regular gifts from your income. This will apply where:

  • the payments are part of normal expenditure, i.e. there is a regular pattern of giving;
  • the payments are made from your income, as opposed to capital; and
  • after making the gifts, you are left with sufficient income to maintain your usual standard of living.

There is no limit on the value of gifts that can be made under this exemption.

Wedding gifts

It is helpful to know that you can make tax exempt financial gifts to someone getting married or registering a civil partnership. The amount you can give depends on your relationship to the recipient. You can give your child up to £5,000, a grandchild or great-grandchild up to £2,500, and another person up to £1,000. The gifts must be made before or at the time of the ceremony.

Gifts between partners

Provided you and your spouse/civil partner both live permanently in the UK, there is no inheritance tax payable on gifts to each other. Since 2007, married couples and civil partners have been able to transfer their £325,000 nil rate band allowance on death between them. Any unused nil rate band of the first partner to die can be used on the second partner's death, which means that up to £650,000 of your joint estate could be left to your family tax-free.

Transfers into trusts

Gifts into certain types of trust attract an immediate charge, but only where their value is above the £325,000 threshold. The nil rate band is effectively renewed every seven years, which means you can significantly reduce the value of your estate by making regular seven-yearly gifts into a trust.

The seven-year rule

Gifts that do not fall within the exemptions will usually be classified as potentially exempt transfers. This means no tax is charged when the gift is made, and it will continue to be exempt if you survive for seven years from making it. This is known as the seven-year rule, which prevents people from giving away their entire estate on their deathbed and avoiding inheritance tax altogether.

If you die within seven years of a making a potentially exempt transfer and the gift is over your nil rate band allowance, you will be taxed on a sliding scale. For example, if you make a gift and die five years later, inheritance tax will be charged on that gift at 16 per cent rather than 40 per cent.

Lifetime giving is an important way of passing on your wealth to future generations. If you are considering spreading some festive cheer and making some significant financial gifts, consider speaking to your solicitor first. Seeking legal advice at an early stage could ensure more of your money ends up in your grandchildren's Christmas stockings.

For more information on inheritance tax in agricultural families, or any enquiries regarding wills, estates or tax planning, please contact Emma Elwess on 01653 692247 or email Emma.Elwess@pearslaw.co.uk.