UK IHT gifts – exemptions and reliefs

This article is designed to give you a basic understanding of the exemptions and reliefs available for UK inheritance tax payable on gifts.

Gifts and exemptions

Spouse/civil partner exemption

There is no UK inheritance tax (IHT) to pay on transfers between most married couples or civil partners* living in the UK,** whatever the amount.

Effectively the amount liable to IHT is deferred until the death of the second spouse/civil partner.

However, if you do decide to pass all your estate on to your spouse/civil partner, a potential liability can build up again on their death. That is why many couples decide to pass some of their estate on to their children or grandchildren (up to the Nil Rate Band or by a lifetime trust), rather than to the surviving spouse/civil partner.

* As defined by the Civil Partnership Act 2004.

** For those married to a non-UK domiciled spouse/civil partner living in the UK, the exemption is£325,000 except where a non-UK domiciled spouse/civil partner elects to be treated as UK domiciled for IHT purposes and will benefit from un-capped IHT-exempt transfers from their spouse/civil partner.

Annual exemption

Individuals are entitled to give away £3,000 in total, in any tax year, free from IHT. This allowance can be backdated by one year, so where the full £3,000 is not used in one tax year it can be carried forward to the next.

This means a married couple could give away a total of £6,000 a year to their children without incurring IHT (or £12,000 if the previous year's allowances were unused).

Small gift exemption

Outright gifts of up to £250 in total, to each of any number of people in one year, are exempt from IHT. The total of any one person’s allowance cannot form part of any larger gift.

Normal expenditure from income

Lifetime gifts are gifts made by you while you are alive. To benefit from this exemption the gifts need to be made regularly (eg yearly) and out of true income (eg dividends and interest from investments). Provided they do not affect your usual standard of living, they should be exempt from IHT. There is no maximum limit on the amount which can qualify for this IHT exemption, however this amount is only confirmed (or not) as exempt on death and therefore some gifts may still be classed as being within your estate for IHT purposes.

Marriage or civil partnership gifts exemption

Gifts made in consideration of a marriage or civil partnerships are exempt as follows:

Other exemptions

Lifetime gifts for the upbringing of children and other dependants are free from IHT liability. Also exempt are gifts and bequests:

• to charities
• to political parties
• to universities
• for national purposes
• for public benefit.

Gifts and tax reliefs

Owners of businesses are eligible for certain tax reliefs, depending on the type of business. In many instances, a transfer during life, or on death, is completely free from any IHT liability. The main tax reliefs, which are subject to minimum periods of ownership, are set out below.

Double tax arrangements

If you make a transfer which is liable not only to UK IHT but also to tax imposed by another country, there may be some relief either under a double taxation agreement or, by virtue of S159 Inheritance Taxes Act 1984, under ´unilateral´ provisions.

Double tax convention (DTC)

The UK has a number of bilateral DTCs for taxes on estates, gifts and inheritances. It may be that each of two states has the right under its law to tax the same property when a death occurs or a gift is made. The purpose of a DTC is to relieve any double taxation which would otherwise result.

Any provisions which relate to estate duty in existing DTCs also extend to capital transfer tax and IHT on death but not to lifetime transfers. The UK has DTCs with France, India, Italy, Pakistan, Switzerland, Eire, Netherlands, South Africa, Sweden and USA.

Unilateral relief

Where no DTC exists, unilateral relief may be given. Unilateral credit relief is also applied where the relief given is greater than would be available under a DTC. Unilateral relief allows a credit against UK IHT for the tax charged by another country on property situated in that country. In this circumstance, the location of the property is determined by UK law. If more tax is charged on that property by the other country than the liability to UK IHT, then, the credit is limited to the amount of UK IHT. Credit is given where both the UK and another country impose tax on:

• property situated in a third country; or
• property which is situated both in UK under UK law and in the other country under that country’s law.

In these cases, the credit given is for a proportion of the tax.

Special rules for Italian, French, Indian and Pakistani domiciles

You could be domiciled for tax purposes in two places; in a foreign territory under general law and in the UK under the deeming provisions, with the result that both territories would tax you on your worldwide assets passing on death.

However, for historic reasons (ie the continuing DTCs relating to estate duty), special rules apply (on death only) to people domiciled in Italy, France, India and Pakistan.

If you are domiciled in any of these countries under the general law, you will not be subject to the UK deemed domicile provisions. Further, you will only be subject to UK IHT on your UK situs assets. But to take advantage of this ‘treaty protection’ it is important that any Will governed by UK law deals only with those UK situs assets. So you will, for example, need to have an Italian Will to deal with assets located in Italy.