IHT: Exemptions and reliefs

Question 1

What exemptions and reliefs are available for lifetime transfers?

Answer 1

Annual exemption

Family maintenance exemption

Small gifts exemption

Marriage exemption

Normal expenditure out of income exemption

Taper relief

Question 2

What is the annual exemption?

Answer 2

AE allows individuals to make gifts of up to £3,000 each tax year free of IHT.

Question 3

How should the annual exemption be applied?

Answer 3

If more than one transfer is made on one day, the annual exemption is applied pro rata.

AE should be applied after any other exemption or relief.

A maximum of 2 x AE (£6,000) may be available to use against a transfer.

Question 4

When does the tax year run from?

Answer 4

6 April one year to 5 April the following year.

Question 5

What is family maintenance?

Answer 5

This is not treated as a transfer for IHT purposes if made to:

A spouse (or former spouse in a divorce settlement)

The minor child of either party to a marriage for maintenance, education or training, or if over 18 and in full time education or training.

A dependant relative to make reasonable provision for their care.

Question 6

Why is the family maintenance exemption sometimes used over the spouse exemption?

Answer 6

Because it can be used when the spouse exemption is unavailable e.g. if the recipient is domiciled outside of the UK

Question 7

What is the small gifts allowance?

Answer 7

A transferor can make multiple gifts up to £250 to as many different people as they like exempt from tax.

Question 8

When does the small gifts allowance not apply?

Answer 8

It is not available if combined with any other exemption including AE. For example, if a donor wants to give away £3,250 they cannot give this amount to one person and claim the AE and small gift allowance to cover the full value.

If gifts to any one person in the same tax year exceed £250 the exemption does not apply AT ALL for that donee.

Question 9

What is the marriage exemption?

Answer 9

A gift given in consideration of a marriage to one party of that marriage is exempt up to:

• £5,000 if made by a parent of one of the parties
• £2,500 if made by one party of the marriage to the other
• £2,500 if made by their remoter ancestor e.g. grandparent or great-grandparent
• £1,000 in any other case

Question 10

Can the marriage exemption and annual exemption be claimed in respect of the same gift?

Answer 10

Yes

Question 11

For the purposes of the marriage exemption, what does `child’ mean?

Answer 11

`child’ includes an illegitimate child, an adopted child and a step-child

Question 12

What is the total amount of money that could be given under the marriage exemption?

Answer 12

The relief applies per donor in respect of marriage so each parent of both parties could give £5,000 to their own child and together in total claim a maximum relief of £20,000

Question 13

What is the normal expenditure out of income?

Answer 13

A transfer of value is exempt if made:

From the donor’s income (not capital)

As part of a normal/regular pattern of giving, and

Do not affect the donor’s standard of living

Question 14

Is there an upper limit to normal expenditure out of income?

Answer 14

There is no upper limit to this exemption

HMRC are more likely to accept the relief applies if transfers are made under a legal obligation, or there I clear history of a settled pattern of giving e.g. monthly payments

Question 15

What is the purpose of taper relief?

Answer 15

Taper Relief reduces the amount of IHT due in resect of a lifetime gift which becomes taxable following the donor’s death.

Question 16

What IHT exemptions apply to lifetime and death?

Answer 16

Spouse exemption

Charity exemption

Political party exemption

exemptions for gifts for national purposes or to heritage maintenance funds

Exemption for gifts to EBTs

Exemption for gifts to housing associations

Question 17

What is the spouse exemption?

Answer 17

It means that gifts between spouses during their lifetime and death are exempt from IHT.

Question 18

What are the conditions for the spousal exemption?

Answer 18

Both parties must be domiciled within the UK.

Unmarried couples cannot claim the spouse exemption

A gift may be conditional provided the condition is satisfied within 12 months.

It does not apply if the spouse receives a remainder interest.

Question 19

What is the charity exemption?

Answer 19

All transfers to registered charities during lifetime or death are exempt from IHT.

Question 20

What are the conditions for the charity exemption to apply?

Answer 20

The gift can be conditional providing the condition is satisfied within 12 months.

The gift must be immediate and not in the remainder for the exemption to apply.

To qualify for an IHT exemption a gift must be made to a charity that comes within the jurisdiction of the High Court in England, Wales or Northern Ireland or the Court of Session in Scotland.

A search of the UK national register of charities will reveal whether a charity is registered in the UK.

Question 21

What is another benefit of gifting to charity for IHT purposes?

Answer 21

A reduced rate of IHT (36% instead of 40%) may be available in respect of the chargeable assets in the estate if the deceased leaves at least 10% of their estate to charity.

Question 22

What are gifts to political parties?

Answer 22

In order to qualify for the exemption, one of the following conditions must apply:

The party had at least two MPs elected

The party had at least one MP elected and at least 150,000 votes given to candidates representing that party.

Question 23

What are gifts of land to housing associations?

Answer 23

A gift of land is exempt from IHT if it is made to a housing association or to a registered social landlord.

Question 24

What are gifts for national purposes?

Answer 24

Gifts are exempt from IHT where they are made for designated `national purposes’.

The list includes museums and galleries which exist for specified purposes that are for the public benefit (such as the National Gallery and British Museum).

Question 25

What are gifts to heritage maintenance funds?

Answer 25

These are trusts which maintain historic buildings or land of scenic, scientific and historic interest.

Question 26

What are gifts to employee benefit trusts?

Answer 26

There is another exemption from transfers of shares made into EBTs, providing they satisfy strict conditions.

Question 27

What is the conditions for BRP to apply?

Answer 27

The person must have owned qualifying business assets for a qualifying period of time

Question 28

What are qualifying business assets and what relief will be applied?

Answer 28

Unquoted shares - 100%

Quoted shares (must control the company i.e. 50% or more) - 50%

Business or interest in the business - 100%

Assets owned by the taxpayer but used for the business - 50%

Question 29

What are investment assets?

Answer 29

A business or shares in a business will not be a qualifying business asset if the business concerned consists wholly or mainly of:

Dealing in securities, stocks & shares, land or buildings

Making or holding investment e.g. rental property

Question 30

What is the qualifying period of ownership for BRP?

Answer 30

The transferor must have owned the qualifying assets continuously for at least two years before the transfer.

Question 31

What exceptions apply in relation to the two-year rule for BPR?

Answer 31

If qualifying assets are sold or replaced with new qualifying assets within a certain period of time, the taxpayers ownership is treated as continuous.

If they have inherited the qualifying asset, they are deemed to have acquired the asset on the date of death.

If a person inherits business assets following the death of their spouse, they are deemed to have owned the property from the time it was originally acquired by their deceased spouse irrespective of how long they have been married.

Question 32

What are the rules in relation to BPR and lifetime transfers?

Answer 32

Where a taxpayer makes a PET or LCT of qualifying business assets and this transfer is assessed to IHT following the death of the transferor within 7 years, BRP is only available for the lifetime transfer if the qualifying property transferred:

• is owned by the transferee; and
• qualifies to BRP when the transferor died
• There is no minimum ownership requirement of 2 years.

Question 33

What are the requirements for APR?

Answer 33

The person must have owned qualifying agricultural assets for a qualifying period of time.

Question 34

What are qualifying assets for APR purposes?

Answer 34

Agricultural land and buildings: used for purposes connected with agricultural activity.

Farmhouses and cottages: may qualify if used for the purposes of agriculture and not domestic purposes.

Question 35

What is the qualifying period of ownership for APR?

Answer 35

Qualifying property must have been:

Occupied by the transferor throughout the two years immediately before the transfer is made.

Owned by the transferor and occupied by them or another for agricultural purposes throughout the seven years immediately before the transfer.

Question 36

What are the exceptions to the qualifying periods of ownership for APR?

Answer 36

If qualifying assets are sold and replaced with other qualifying assets, the taxpayers period of ownership is deemed continuous.

If a person inherits qualifying assets, they are deemed to acquire the assets on the date of death

If a person inherits qualifying assets following the death of their spouse, they are deemed to have owned the property from when it was originally acquired by the deceased spouse irrespective of how long they were married.

Question 37

What are the rates of relief in relation to APR?

Answer 37

APR of 100% applies in most cases, but if the property was subject to a tenancy that started before September 1995, 50% relief will apply.

Question 38

What is the position in relation to APR and lifetime transfers?

Answer 38

Where a tax payer makes a PET or LCT of qualifying agricultural property and the transfer is assessed to IHT following the death of the transferor within 7 years, APR is only available if the qualifying property transferred:

• is owned by the transferee
• qualifies for APR when the transferor dies
• there is no minimum ownership requirement of 2 years for the transferee.

Question 39

What is the position where APR and BRP apply?

Answer 39

It is not possible to claim BRP and APR on an asset. Therefore, where both reliefs apply, APR is given priority.

Question 40

What would livestock qualify for?

Answer 40

BPR

Question 41

What would farmhouses/cottages qualify for?

Answer 41

May qualify for APR, but unlikely to qualify for BRP.

Question 42

For woodlands relief to apply how long must the deceased have owned the woodland for before dying?

Answer 42

At least 5 years before dying.

However, if the deceased inherited the woodland following someone else’s death, there is no qualifying period of ownership.

Question 43

What does it mean that woodlands relief is deferral?

Answer 43

Tax is deferred until the timber, not the land, is subsequently sold or given away.

The value of the woodland is the value of the trees and not the land itself.

Question 44

How can the woodlands deferral be used?

Answer 44

To use the deferral those administering the estate should make an election to exclude the value of the woodland from the death estate.

Question 45

As woodlands relief only applies to the value of the timber and not the land, what other alternative reliefs should be considered?

Answer 45

BRP should be considered where woodland is used for commercial purposes e.g. fishing or timber harvesting.

APR should be used if the land is classified as agricultural land or ancillary to it.

Question 46

When does QSR apply?

Answer 46

• Their death estate includes assets received by way of gift or inheritance,
• In the 5 years before their death, and
• Those assets were subject to an IHT charge when transferred to the deceased.

Question 47

When will QSR be relevant?

Answer 47

For QSR to be relevant IHT must have been payable – both on the original transfer and following the subsequent death.

Question 48

What are the reliefs applied in relation to QSR?

Answer 48

If death occurs with one year of the previous IHT charge, the relief is calculated with reference to 100% of the amount of IHT paid previously. This reduces each year

Only 20% of the amount of IHT paid previously is considered where death occurs 4-5 years after the original charge.