Question: I AM confused about the kind of gifts I can pass on that are exempt from inheritance tax (IHT). Apparently if you don't use up your £3,000 allowance one year it can be carried over to the next. If the sum is carried over, can both this year's and the previous year's allowance be gifted to one person? Are there any other ways to mitigate a potential IHT charge? GC, Stirling
Answer: YOU are right in saying that your 3,000 annual exemption can be carried over to the next year if you don't use it, but not to any subsequent year. If unused, both this year's and the previous year's allowance can be given away to the same person. Any gifts made to your husband, wife or civil partner are not liable to IHT, as long as they have a permanent home in the UK.
There are also other gifts which you can make during your lifetime which are exempt from IHT. For example, wedding gifts or civil partnership ceremony gifts. Parents can give cash or gifts worth 5,000, grandparents and great-grandparents can each give cash or gifts worth 2,500 and anyone else can give cash or gifts worth 1,000. Bear in mind that the gift must be made close to or at the time of the marriage and must be conditional on the marriage taking place.
You can also make small gifts up to the value of 250 to as many people as you like in one tax year. However, you cannot use your small gifts allowance together with any other exemption when giving to the same person.
Beyond these exemptions, any gifts you make to individuals will be exempt from IHT as long as you live for seven years after making the gift. These sorts of gifts are known as potentially exempt transfers (Pets). However, if you give an asset away at any time but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a Pet.
As well as gifting, there are many other ways in which you can mitigate IHT. One is to set up a trust. There could be IHT payable when you set it up, but if the amount falls within your available nil rate band - currently 325,000 - no tax would be payable. Provided you then survive another seven years, no further tax should be payable on your death.
Remember that a trust would generally have to be set up using a single initial injection of capital as instalment payments to trusts can, depending on the circumstances, have adverse tax consequences.
Another way to mitigate potential IHT is to have a life assurance policy in place. There are many options involving whole of life policies which could be investment-backed or guaranteed.
These policies are designed to pay out a tax-free lump sum on death and if written under trust, which I would strongly recommend, they should pay for any potential IHT liability.
Generally policies that pay out on death should be written in trust to someone other than the surviving spouse in order to isolate the pay-out from the estate of the deceased, thereby not increasing or creating an IHT charge.
In certain cases, a short-term immediate solution could be the implementation of a term assurance policy, which as the name suggests lasts for a certain period of time, typically seven years to cover Pets.• Glen Gilson is a partner and head of private client & financial services at HBJ Gateley.
If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: email@example.com. The above is for general purposes only and is not tailored for individual use.
It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article.
Search for a job
Search for a car
Search for a house
Weather for Edinburgh
Thursday 23 May 2013
Temperature: 5 C to 10 C
Wind Speed: 23 mph
Wind direction: North west
Temperature: 4 C to 13 C
Wind Speed: 17 mph
Wind direction: North east