· An estate passing to a surviving spouse or civil partner is exempt from IHT (subject to any mismatch of domiciles).
· Lifetime gifts of up to £3,000 in any tax year are exempt from IHT, and any unused exemption can be carried forward one year. There are also small gift exemptions (up to £250 to any one person) and gifts in consideration of marriage/civil partnership. For example, each parent can give their child up to £5,000 when they are married, making the total £10,000.
· Gifts made to charities and political parties are exempt from IHT, as are some gifts of heritage assets. Where an individual bequeaths 10 per cent or more of their estate to charity, the IHT rate applicable to the remainder of their estate is reduced from 40 per cent to 36 per cent.
· Where gifts are made during a person's lifetime out of surplus income, the value is exempt from IHT provided the donor can demonstrate that their standard of living was not adversely affected, the gift was made out of income (not capital) and that there is an intention to make regular gifts. It is possible to carry back up to two tax years for the purpose of claiming the exemption. Anyone wishing to rely on this exemption should maintain records of their income and expenditure, and the format HMRC requires is on page 6 of the IHT403 gifts and other transfers of value form.
Potentially exempt transfers (Pets)
Unless a gift is a chargeable lifetime transfer or exempt, it will be a Pet. No IHT is payable when a Pet is made, although if the donor dies within seven years, IHT is brought back into the charge. If death happens within three years, IHT is payable at the full rate, and then the tax liability is reduced by 20 per cent each year thereafter.
At its simplest, an estate planning strategy could involve someone giving away everything they own valued in excess of the nil rate band and then surviving for seven years. This is what Roy Jenkins meant when he said that IHT is a voluntary tax. However, as a consequence, the donor may end up trusting their heirs to provide them with financial support later on in life, which may be a far less appealing prospect than exposing their estate to IHT.
Statutory reliefs
There are certain statutory IHT reliefs available for particular assets, such as business property relief, agricultural property relief and woodlands relief. Relief is available at either 100 per cent or 50 per cent. With some exceptions, the asset must be held for a minimum qualifying period of two years. For anyone wishing to reduce their exposure to IHT without making gifts, investing in assets that qualify for these reliefs, such as shares in unquoted trading companies or woodland, can be attractive.
