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Probate - Gifts Exempt from Inheritance Tax

Potentially Exempt Gifts

Giving away assets before your death is a recognised way of reducing the potential Inheritance Tax burden. Any assets given away more than seven years before the death are not counted as part of the estate and do not have to be valued, hence the phrase "Potentially Exempt Transfer" (often abbreviated to PET).

Specified Transfers

For gifts made within seven years to be exempt from IHT they have to be so-called "specified transfers". This simply means that they need to be one of the following:

  • cash
  • listed stocks and shares
  • land or buildings
  • personal belongings such as clothes, cars, household goods

If they are of this sort then the following exemptions can be applied:

Gifts to a Spouse or Civil Partner

Unlimited amounts can be freely transferred either before death or in a will and they will always be exempt from Inheritance Tax. The partner must normally be resident in the UK.

Gifts to Charities and Exempt Organisations

Unlimited amounts can be given to exempt organisations. These organisations are:

  • UK registered charities and Community Amateur Sports Clubs. Gifts made after 6 April 2010 to charities established in the EU should also be exempt, and gifts made to EU charities after 27 January 2009 will be considered. The law seems not to be fully clarified on EU charities yet so you should claim the exemption but be aware of a small possibility that the claim will be contested.
  • National institutions e.g. museums, universities and the National Trust
  • A UK political party, providing that it has at least two MPs or one MP and at least 150,000 votes

Annual Exemption for Gifts

You can give away up to £3,000 in each tax year. Unused portions of the previous year's allowance can be carried forward to the following year. For instance if a parent bought a car worth £10,000 for their child and the previous year's allowance was unused then only £4,000 would be liable for Inheritance Tax (£10,000 - 2 x £3,000 = £4,000).

Small Gifts

You can give away up to £250 to an unlimited number of people but this cannot be added to any other exempt gift.

Wedding gifts/civil partnership ceremony gifts

The following limits apply:

  • Parents can give up to £5,000
  • Grandparents and more distant relatives can give presents worth £2,500
  • You can give wedding/civil partnership presents to anyone up to £1,000

Regular Gifts out of Income

Gifts made regularly out of surplus net income are exempt providing the donor's standard of living is not adversely affected. A certain amount of saved income can be used but anything over a year might be contested. A certain amount of non-regularity would probably be allowed, as would a degree of variation in the amount given each time.

This gift is limited in size only by the amount of surplus income. It is not given automatically. The personal representative must claim it and may need to demonstrate its validity. A single payment could potentially qualify if it can be shown there was a clear intention that was to be the first of a regular series of gifts.

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