IHT and gifting

20 Feb 2019

What advisers need to know about IHT and gifting

While the inheritance tax (IHT) threshold of £325,000 might seem high, the reality is that more and more clients are falling into the IHT bracket.

Figures from the Office for National Statistics showed that the government collected £5.1 billion in IHT in the year to May 2017, up 9% on the £4.7 billion collected just 12 months earlier.

The rules and exemptions around inheritance tax can change regularly, which give you an excellent opportunity to review your clients’ needs. And, with the right planning, you can reduce or mitigate a client’s inheritance tax bill.

Gifting is one way that you can help your clients with their estate planning. Keep reading for everything you need to know about IHT and gifting.

Your overview of IHT exempt gifts

Making a gift to family or friends while alive can be a good way for your clients to reduce the value of their estate for IHT purposes. And, there are several types of gift that your clients can make which are exempt from inheritance tax.

These include:

  • The annual exemption – an individual can give away £3,000 in total each tax year, free from IHT. This amount can be backdated by one year, meaning that any unused allowance can also be carried forward into the next tax year. Your client could gift £3,000 every tax year without incurring any inheritance tax.
  • Marriage and civil partnership gifts – your client can gift up to £5,000 to their child if they are getting married/registering a civil partnership. They can gift £2,500 to a grandchild or great-grandchild, and up to £1,000 to anyone else.
  • The ‘small gift’ exemption – your clients can make gifts of up to £250 in total to any number of people in one tax year.
  • Gifts from surplus income – if your client maintains their standard of living, they can make gifts from income (such as a monthly contribution to their child’s savings account).
  • Charitable gifts – gifts your clients make to a charity, museum, university or community amateur sports club are all exempt from IHT.

Other exemptions include gifts given for the upbringing of children under 18, some gifts to political parties and some gifts to universities.

Potentially exempt transfers (PETs)

Another way that your clients can mitigate a potential IHT liability is through potentially exempt transfers.

If they live for more than 7 years after they have made the gift, it becomes fully exempt from inheritance tax. During that 7-year period, the gift is known as a ‘potentially exempt transfer’ or PET.

If your client dies within the 7 years, then there may be an IHT liability, depending on when the gift was given.

How you can guide your clients with regards to gifting

Giving your clients sound advice regarding their estate planning can help them to reduce the amount of inheritance tax that will be due on their death. Advice on tax-exempt gifts and PETs can help them to reduce the value of their estate.

If your clients don’t want to give away their assets, or they want to ensure that any IHT liability is covered in the event of their death within the 7 years of making a gift, you can advise them on suitable life cover.

Many advisers use decreasing term policies to cover potential IHT bills. As the tax due on a potentially exempt transfer reduces during the 7 years (thanks to ‘taper relief’), a policy with a decreasing sum assured can be suitable to cover any potential IHT liability. Make sure you write any such policy in trust, so it pays out outside your client’s estate.

Another alternative is a ‘whole of life’ policy, which will pay out a lump sum on your client’s death.

Written in trust, the proceeds of the policy outside will fall outside your client’s estate for IHT purposes. An added advantage is that the premium paid for the policy will also reduce the value of your client’s estate while they are alive.

Why you should be prepared for an increase in demand for gifting advice

Changes to pension regulations and rising house prices are just two reasons that clients are increasingly seeking advice when it comes to IHT and gifting.

A recent Prudential survey found that 69 per cent of financial advisers expect demand from clients for advice on inheritance tax planning to grow over the next year with 37 per cent forecasting a significant increase.

Paul Harrison, head of business consultancy at Prudential, said: “Rising property and pension wealth are making it increasingly important for advisers to be able to help clients with specialist advice on inheritance tax planning and demand for advice is booming.”

By Lyba Nasir