For Inheritance Tax there are some simple annual

‘use it or lose it’ exemptions. What are these, and

how can you make sure you take full advantage of

them before the current tax year ends on April 5th 2008?

 

What are ‘small’ gifts?

 

Seven-year rule

 

One weapon in the battle to minimise Inheritance

Tax (IHT) bills is to simply give away as much

as possible while you are still alive. This is known

as a ‘potentially exempt transfer’ or PET. Anything

you give away is IHT-free, so long as you survive

for more than seven years after handing it over.

But there are exceptions …

 

Trust trap

 

Since March 22nd 2006, gifts into trusts are generally chargeable transfers. So transfers of value (gifts) are only PETs if you make them to another individual (or a gift into a disabled person’s trust). So making outright gifts is OK; putting them into the hands of trustees first isn’t.

 

Common sense

 

Obviously don’t give away anything you might need at a later date. While, say, your children may be willing to hand back any money you need later on, they may not be able to do so. For instance, it may have been lost in a divorce settlement, as the result of an unfortunate investment or business venture or simply frittered away. Remember, once you pass assets on in this way, you don’t have any further control over them. So why not make a ‘small’ gift instead …

 

Small gifts exemption

 

Outright lifetime gifts, of up to £250 to any one person in a tax year, are exempt. This is in addition to the annual exemption of £3,000 and applies to any number of gifts that are made to different persons. However, the exemption cannot be used to offset the first slice of a larger gift, or a series of gifts which in total exceed £250. useful, but quite small.

 

Annual exemption

 

Under this exemption, £3,000 can be given away each tax year (April 6th to April 5th) free of IHT. This means that, even if death occurs within the next seven years, the gift can be ignored. Better still, if the £3,000 exemption isn’t used in one year, it can be used in the following year instead. So £6,000 could be given in one year, escaping IHT completely.

 

Last minute cheques

 

Clearing the cheque

 

Can you simply hand over a cheque for £6,000 on April 5th (the last day of the tax year) it being banked ‘later’ by the recipient of the gift in order to use up two years worth of your annual exemption? Unfortunately, the Taxman says that if the cheque hasn’t been cleared by the bank before April 6th, the gift is not complete. Therefore you’ll lose out on using your exemption.

 

Case law

 

This very point was the subject of a 2003 tax case (Curnock v IRC SPC 365) which the Taxman won. So an uncleared cheque for £6,000 gets added back into your estate for IHT purposes.

 

Tip

 

If you want to make a gift that is efficient for IHT, don’t wait until April 5th 2008. Making it a few days earlier would be much more sensible enabling you to utilise your IHT exemptions for 2007/08. Note, this ‘clearing of the cheque’ tip can be used for other taxes, not just IHT. Get into the habit of making regular gifts during your lifetime; this will help them escape the IHT net.