17th November 2022
To gift or not to gift? The impact of the Autumn Statement on Inheritance Tax
Today’s Autumn Statement saw Chancellor of the Exchequer, Jeremy Hunt, announce what had been predicted by many – an extension to the freeze on the Inheritance Tax Nil Rate Band allowance – amongst other financial measures.
The Nil Rate Band allowance has been fixed at its current level of £325,000 per individual since 2009 and will now remain at its current level until the 2027-28 tax year. By not increasing the allowance in line with inflation, which is at its highest rate in 40 years, the Treasury is expected to raise as much as half a billion pounds in a bid to plug the current hole in public finances. Had the allowance been increased in line with inflation, this would have resulted in the current allowance being in the region of £428,000. This had led many individuals whose estates will fall subject to the Inheritance Tax regime due to the value of their estates to consider whether they can afford to make gifts during their lifetime to mitigate the liability to Inheritance Tax upon their death.
The Nil Rate Band allowance can be used by an individual in their lifetime as a tax planning tool, perhaps by placing assets into trust or by making outright gifts, to reduce the Inheritance Tax burden upon their future estate. Provided the individual survives seven years from the date of making the gift, the value of said gift falls outside of their estate for Inheritance Tax purposes. The gift may however be subject to Inheritance Tax should the individual not survive the seven-year period, subject to the availability of the individual’s Nil-Rate Band allowance, and it is therefore paramount that accurate records are kept of gifts to assist the Executors in accurately reporting the position to HMRC.
There are various gifting allowances that are available to be offset against the deceased’s estate for any gifts that fall foul of the seven-year survivorship period, depending on the nature of the gift and to whom it was gifted: wedding gifts (the value of the allowance is dependent on the recipient of the gift), gifts to charities or political parties and small gifts of £250 per person per tax year. Gifts between spouses are tax-free, and any gifts that do not fall within the allowances would be subject to an annual exemption of £3,000 per tax year, which may be carried forward if unused for one tax year – and one tax year only; this allowance cannot be “banked” and offset against a larger gift if an individual has not used the allowance before.
Another useful gifting allowance should an individual be in receipt of a significant income relates to gifting out of their excess income. Provided the individual can continue to maintain their usual standard of living, they can make gifts out of their surplus income, which could potentially be used to fund school fees or assist family members with their living costs. The rules surrounding gifts out of excess income are complex, but largely require that the following conditions are satisfied:
- The gift is made out of the individual’s usual expenditure;
- The gift is made out of the individual’s income (not from savings or other capital sources); and
- Even after making the gift, the individual was left with enough income to maintain their normal standard of living.
There must also be a repetitive nature to the gifts, so a clear pattern would need to be identifiable. If claiming this exemption, the Executors would be required to demonstrate a full breakdown of the income, expenditure and surplus sums available, and so it would therefore, once again, be highly beneficial that the individual keeps clear and accurate records – one would argue that they would need these in any event to calculate that the income gifted was indeed surplus to requirements.
One should also be mindful of the subject matter of a gift; cash can be easily gifted, but if an individual is looking to gift property or stocks and shares in a bid to reduce their Inheritance Tax liability, they may end up finding themselves liable for Capital Gains Tax on any gain in value. This may, in turn, result in them being liable for one tax during their lifetime, and another on death should they not survive the seven-year period.
Gifting is a rather complex area of law, and it is recommended that professional advice is sought about what can be given away tax free during your lifetime. If you would like further advice from Buss Murton in this regard, please contact 01892 510222 to speak to a member of the Private Client Team.