Key UK inheritance tax considerations in relation to gifting
Giving, or ‘gifting’ occurs all the time and over the years we have assisted many UK resident individuals and families with regard to tax efficient gifting. Below are some answers to a series of key questions that are often asked in relation to gifting.
I am UK resident and UK domiciled. What are the UK inheritance tax consequences of making a gift?
Firstly, consider the nil rate band (“NRB”). The NRB is the part of an individual’s estate which for inheritance tax (“IHT”) purposes, is taxed at 0%. Currently the NRB is capped at £325,000 and, broadly speaking, follows a seven-year cycle at which point it resets.
To the extent that it is not exempt (for which, see below), a lifetime gift to an individual is, under English law, a potentially exempt transfer (“PET”) for the purposes of IHT. No tax arises at the time of the gift (but the NRB is depleted by its value) and if the gift is survived by seven years from the date it is made, no tax will be payable. If the donor dies within seven years, the gift becomes a chargeable transfer and any amount above the donor’s NRB becomes subject to IHT at up to 40%.
Utilising the full NRB is useful for lifetime gifting without incurring tax, and can be an effective estate planning tool for individuals who wish to reduce their UK taxable estate during their lifetime (thereby reducing what is subject to IHT on their death).
Are there any UK IHT tax reliefs or exemptions?
There are a variety of useful tax reliefs and exemptions. Below is a brief summary of the most common and useful exemptions:
- Spouse exemption - gifts made to one’s spouse or civil partner are exempt from tax irrespective of their size, although, see below in relation to spouses with a domicile mismatch.
- Charity exemption – any gift to a qualifying charity is completely exempt if it is used exclusively for the purposes of the charity.
- Annual exemption - you can give away a total of (at present) £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. Gifts or money of this value can be used on one person or can be split (to a maximum aggregate value of £3,000) between several people. You can carry any unused annual exemption forward to the next tax year - but only for one tax year. The UK tax year runs from 6 April to 5 April the following year.
- Small gifts allowance – transfers of up to £250 can be made to as many different people as one wishes. This allowance is not available where a gift exceeds £250, in which case you should rely on your annual exemption.
- Wedding / civil partnership exemption – a gift in consideration of a marriage or civil partnership is exempt up to:
- £5,000 if made by a parent of one of the parties – this is useful as the relief applies ‘per donor’ so each parent could give up to £10,000 i.e. a potential total of £20,000;
- £2,500 if made by a remote ancestor of one of the parties (e.g. a grandparent); and
- £1,000 in any other case.
- Business Property Relief / Agricultural Property Relief – These reliefs are both complex and advice should always be sought to check whether the property qualifies for the relief, but broadly speaking, an IHT relief of up to 100% can be attributed to qualifying business and/or agricultural assets.
What is excluded property for UK inheritance tax purposes?
Importantly in relation to gifts, the estate of an individual who is not domiciled or deemed domiciled in the UK is considered ‘excluded property’ for IHT purposes (subject to certain exceptions which are not covered in this article). Therefore, to the extent that assets remain outside of (i.e. are not brought into) the UK, they are excluded property. For example, a Swiss national resident but not domiciled in the UK, who owns a UK property and UK bank accounts, but whose remaining worldwide estate is situate in Switzerland and France, will only be liable to IHT on their UK situs assets. If they become deemed domiciled or actually domiciled in the UK, all of their worldwide assets will be subject to IHT.
I am UK resident but not domiciled or deemed domiciled in the UK. What are the UK inheritance tax consequences of making a gift?
Domicile is a complex English law concept which is not discussed in this article. For a more detailed explanation of domicile, see What is domicile and why is it important?
There is a significant advantage to gifting for UK resident non-domiciled individuals with excluded property because they are able to freely gift their non-UK assets without giving rise to the IHT rules discussed above (although, taxation advice should be sought in the relevant overseas jurisdiction). Therefore, gifts of excluded property will not deplete a persons NRB or be considered a PET, and will not give rise to a UK tax liability at the time the gift is made or in the future (i.e. on death). Gifts of UK situs property, however, will be subject to the IHT rules discussed above. It is therefore important for UK resident non-domiciled individuals to give consideration to their UK estate (which is taxable) and their non-UK estate (which is excluded property), and plan accordingly.
My spouse or civil partner is non-UK domiciled and I would like to make a gift to them. Is there anything I need to consider?
The spouse exemption applies to all spouses and civil partners (hereafter reference will only made to spouses) who are both resident and domiciled in the UK.
Different rules apply where there is a domicile mismatch between spouses so that gifts made from a UK domiciled spouse to a non-UK domiciled spouse are subject to an upper lifetime limit, currently equivalent (but separate) to the NRB (£325,000). As this is a lifetime limit, once it has been used, there is no reset period, unlike the NRB. Any spousal transfer above this limit where there is a domicile mismatch would be a PET and subject to the seven-year rule. Effective planning can mitigate tax due on spousal mismatch transfers, such as use of the NRB (if available) or by way of a domicile election which is where the non-UK domiciled spouse elects to be treated as UK domiciled, giving rise to a spousal domicile match and allowing for full use of the spouse exemption.
Where there is a domicile mismatch, planning should be treated with caution, particularly where a non-domiciled spouse owns excluded property of significant value, which by virtue of an election would immediately become subject to IHT. It is not impossible for an electee to subsequently lose their UK domicile, but this could take years to achieve, and may give rise to challenge from the UK revenue authorities in the event of a non-domicile claim on death. The merit of an election will always depend on the circumstances of the individuals involved, and advice should be sought to ascertain whether it is a sensible option or not.
Do I need to consider any other taxes?
The short answer is, probably, but not always, and it really depends on the type of asset(s) in question. There may be other tax considerations, for example, capital gains tax and/or stamp duty land tax. Equally, taxation advice for the gift recipient may also need to be considered. The cross-border tax team at Charles Russell Speechlys frequently advise individuals and families in this area and would be happy to assist.
