Inheritance Tax Exemptions Part 2

Potentially Exempt Transfers

Potentially Exempt Transfers (or PETs) are gifts which are exempt from Inheritance Tax, the caveat is that the transfers had to have occurred 7 year or more prior to your death. Since there is no way to accurately predict when you are going to die, its called a Potentially Exempt Transfer.

In the course of your lifetime, you are able to gift as much as you wish without having to pay IHT, as long as you survive for 7 years. If your estate then falls below the £325,000 threshold (2012/13), then there won’t be any tax liability whatsoever. If the individual dies within the 7 year period of making the gift, then any amount above the threshold will be the amount applicable to IHT.

There is a taper relief on the amounts below the 7 year period:

If the period between the gift and death is over 7 years, you don’t pay any IHT
If the period is 6 to 7 years, you pay 20% of IHT
If the period is 5 to 6 years, you pay 40% of IHT
If the period is 4 to 5 years, you pay 60% of IHT
If the period is 3 to 4 years, you pay 80% of IHT
If the period is less than 3 years, you pay 100% of IHT

Transferable Nil-rate Band

The nil-rate band is transferable if unused upon the first death. For example, if a person dies and the surviving spouse inherits the entire estate but doesn’t use the nil-rate allowance of £325,000 (e.g. no gifts to children or relatives), and then remarries to a different person who subsequently also dies (in the tax year 2012/13), then upon the second death the total allowance would be £650,000.

Spouse or Civil Partner exemptions

Any UK-domiciled spouse or civil partner is not liable for Inheritance Tax on any lifetime gifts or estate upon their spouses/partner’s death. This applies even to amounts above the threshold limit.

Small gift exemptions

Any gifts up to the value of £250, to any number of individuals are IHT exempt

Wedding gifts

Gifts for someone who is getting married or registered as civil partners are IHT exempt according to the following criteria:

Children: up to £5,000
Grandchildren: up to £2,500
Other: up to £1,000

Transfers out of income

If you are willing to give away part of your annual income, you can do so IHT free. The only thing that you have to prove is that the gift does not affect your standard of living. For example, if you earn £50,000 a year, but you are able to live on £35,000 then you could essentially give away £15,000 a year IHT free.

Businesses, Agricultural and Woodland Holdings

Certain assets can have reliefs of up to 100% depending on their eligibility, to find out the qualifications consult your business accountant or the HMRC.