A Simple Guide to UK Inheritance Tax and Tax Efficient Gifting

The UK is often perceived to have one of the most punitive inheritance tax regimes in the world. Generally, individuals pay a 40% rate on the value of their taxable estate above a tax-free allowance of £325,000. In the case of a married couple this tax-free allowance can be passed onto a surviving spouse, which means that, following their death, the estate will enjoy a £650,000 tax free allowance.

Additional Nil Rate Allowance

Individuals, with an estate value greater than their tax-free allowance of £325,000, due to the value of their home, may be able to take advantage of an additional tax-free allowance known as the residence nil rate band (RNRB).  This additional tax allowance is worth up to £175,000 (2023/24) and is available when an individual’s main residence is passed to their children or grandchildren.

People with large estates may not see any benefit from the residence nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.

This means that there is no RNRB available if the deceased holds assets of more than £2.35M.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.

Lifetime Gifts

If money is given away during an individual’s life it does not necessarily mean that the asset is, then outside his/her estate for inheritance tax purposes. This is the case when an asset is gifted away but the donor continues to benefit from the asset. An example would be – continuing to live in a property, even if the legal title has been gifted away (this is known as retaining a benefit).

Gifts, however, made more than seven years prior to death, without the retention of a benefit, will not be included in the deceased’s estate. Any gifts made within seven years will, in most circumstances, form part of the estate.

Business Property Relief APR (BPR) and Agricultural Property Relief (APR)

Business property relief (BPR) and agricultural property relief (APR) are IHT reliefs that may be available on the transfer of certain types of assets.  These two reliefs can often reduce the chargeable value of an asset by 50% or 100% and are extremely valuable tools for minimising the amount chargeable to IHT.

The rules are complex, and a detailed analysis is outside the scope of this article, however the main classes of assets that qualify are as follows: Business Property Relief

Assets eligible for 100% relief:

  • A sole-trading business
  • Partnership shares
  • Shares in an unquoted trading company.

Assets eligible for 50% relief:

  • Shares in a quoted trading company if the individual has voting control i.e. more than 50% ordinary (voting) shares
  • Land, buildings and machinery that is owned by the individual and used in a business where the individual is a partner or a controlling shareholder.

Agricultural Property Relief

Assets that qualify for APR include:

  • Agricultural land
  • Woodland
  • Farm buildings
  • Farmhouses/cottages (if occupied for the purpose of agriculture).

Activities that are specifically exempt from qualifying for APR include:

  • Land that is used for grazing horses
  • Land used by livestock that is not farmed for human consumption
  • Land that is used for sporting activities such as fishing and shooting

Gift Allowances

There are certain gift allowances that can be used year on year, where the seven-year rule is NOT applicable.

The six key gift options are detailed below. These options, if planned for properly across a number of years, can reduce the inheritance tax liability considerably.

Dixcart recommends that a record of all gifts made is kept with the Will.

Give away money each year

Each year an individual can give away up to £3,000. This gift can be to anybody or split across any number of people.

If this allowance is not used one year, it can be carried forward to give £6,000 the next year (it can only be carried forward one year).

Wedding presents

In addition to the annual allowance, parents can each give a wedding gift of up to £5,000 to their children. This gift allowance must be made before the ceremony.

If grandchildren marry, an individual can give up to £2,500 to each grandchild, and for friends or other relatives the wedding gift is up to £1,000 each.

Small gifts

Gifts of up to £250 per person each tax year are excluded from inheritance tax. Care needs to be taken, as anything over this sum could be classed as part of the £3,000 annual allowance. Individuals need to ensure that they have not used any other exemption for the recipient, or the allowance might not apply.

Charitable donations

Helping good causes with monthly donations can reduce the inheritance tax bill.

Charitable gifts are free from inheritance tax, if at least one-tenth of net wealth (calculated as a percentage of the death estate) is donated. The Government subsequently has the discretion to cut an individual’s inheritance tax rate from 40% to 36%.

Contributing to living costs

Money used to support an elderly person, an ex-spouse, and/or a child under the age of 18 or in full-time education, is not considered to be within the deceased’s estate on death, whatever amounts have been paid.

Payments from surplus income

An individual with surplus income should not ignore the opportunities provided by this provision. If the criteria, detailed below are met, the seven year period is not relevant. Such transfers are not deemed to be part of the taxable estate (except on death) and can therefore be exempt from inheritance tax.

The key criteria for a transfer of income to be exempt are:

  • it was made as part of the usual expenditure of the transferor; and
  • the transferor retains sufficient income to maintain his usual standard of living, having taken account of all the income transfers that form part of his usual expenditure.

Additional Information

If you require additional information regarding UK inheritance tax, gift allowances and/or the importance of having a UK Will, which reflects current wishes, please contact Paul Webb: advice.uk@dixcart.com or speak to your usual Dixcart contact.

The information provided within this document is for general informational purposes only. While every effort has been made to ensure its accuracy, no responsibility can be accepted for inaccuracies. Readers are advised that laws and practices may change over time. This document is provided solely for informational purposes and does not constitute accounting, legal, or tax advice. Professional advice should be sought before making any decisions based on the contents of this document.