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Time is ticking – making the most of IHT exemptions

As tax year end is almost upon us, have your clients made the most of their inheritance tax (IHT) exemptions?

Did you know your clients can give as many individuals as they please £250 each. As long as the gift doesn’t exceed this amount (even by a £1) it doesn’t count in their inheritance tax calculation. Handy if your clients have lots of grandchildren!

They are also entitled to gift up to £3,000 each tax year either as a lump sum or as part of a series of gifts. This comes in useful if your clients have a life policy in trust to cover their inheritance tax bill, as this can be used to cover some or all of the premiums to the plan.

For clients with loan trusts, they may want to consider waiving £3,000 of their outstanding loan into the beneficiaries pot and it won’t count as a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT) as it’s exempt. Don’t forget that if they didn’t use last year’s, they can carry the £3,000 forward as long as they firstly fully use up this year’s exemption.

Another underused exemption is for gifts out of income. For clients that have surplus income and can create a pattern of regular gifting, which doesn’t affect their standard of living, these gifts can be classed as exempt. Remember it has to be ‘true’ income such as salary, pensions or interest from their bank account. The 5% tax-deferred withdrawals from bonds don’t count, nor can they use them to replace the income. This can also be used to fund life premiums on a trust held policy, however, if they have a large excess amount they can place this into trust on a regular basis and it won’t count as a PET or CLT either.

For those clients who wish to consider lump-sum gifting, then the sooner the seven-year clock starts the better. Clients with existing bonds might consider placing them into trust if personal access is no longer required.

A bond is an efficient asset to place in trust as it doesn’t produce income, meaning there’s no need for an annual tax return. Bonds are generally segmented, which means the trustees can subsequently assign segments to discretionary beneficiaries (as long as they’re over age 18) who can then encash at their own marginal rates of tax. Gifts into and out of trust do not trigger chargeable events for income tax purposes.

The transfer into trust will be either a PET or a CLT depending on the type of trust used and will normally drop out of the IHT calculation after seven years. Ideal for those looking to reduce their estate for IHT purposes.

These exemptions are available each year and form an important part of an individual’s IHT planning.

For more around tax planning support at tax year end, take a look at our tax year end hub


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