Utilising Exemptions

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    Inheritance Tax is a considerable concern to most clients particularly when they begin the process of writing a will and considering to whom their estate will be left.

    In previous times of spiralling property prices, the number of individuals whose assets exceed the Nil-Rate Band has continued to increase. As a result, more and more people are looking for ways to minimise their Inheritance Tax liabilities.

    Competent IHT planning is essential to ensure the beneficiaries of your client’s will are not going to be burdened with an unaffordable tax bill. There are numerous techniques that can be used in order to achieve this, but one of the key elements of any successful Inheritance Tax strategy is the efficient use of exempt and potentially exempt transfers.

    Potentially exempt transfers can be a highly effective way of reducing IHT liabilities while simultaneously ensuring that assets are passed to your client’s intended beneficiaries.

    Every individual is entitled to give ‘gifts’ from their estate up to a certain value every year.

    Currently the limit on these gifts is set at £3,000 annually. These transfers of assets from an individual to a beneficiary are exempt from Inheritance Tax, and are therefore known as ‘exempt transfers’. This type of giving is particularly attractive as it means that individuals can ensure that their intended beneficiaries receive assets and, in many cases, the giver has the satisfaction of seeing the recipient draw benefit from them.

    It is possible to make gifts over this £3,000 threshold. However, gifts made above this limit but within the Nil-Rate Band are not automatically exempt. In order to be free of IHT, these transfers must satisfy a number of criteria.

    Whether or not this is the case is not known at the time the transfer is made, and so they are described as ‘potentially exempt transfers’.

    Aside from their value, PETs must adhere to another important rule: they must be given more than seven years before the death of the giver. It is now easy to see why they are only ‘potentially’ exempt when the transfer is made.

    If the giver passes away within these seven years, however, there is still the possibility of some tax relief. If the death occurs between three and seven years after the gift then ‘taper relief’ may apply. Under this system a sliding scale of tax relief is available for these gifts.

    It is important to note that there are a number of other forms of exempt transfer. The most common of these of course is transfers between spouses, on which IHT is not generally due. Similarly, ‘small gifts’ of up to £250 may be given to any number of individuals without incurring IHT; gifts to charitable organisations are also free of IHT, regardless of their value.

    Wedding gifts are exempt up to certain levels; parents can give £5000 and grandparents can give £2500.

    It is a good idea to advise your clients to keep an accurate record of any gifts made in an attempt to save IHT to ensure that they make the most of the exemptions and allowances available.

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    Matt Walkden Will Writer

    About Matt Walkden

    I am a Professional Will Writer and I offer a small number of other products that complement my Will Writing such as Lasting Power of Attorneys (LPA’s), Fixed Price Estate Administration, often called Probate and some Property Products such as changing a family home from Joint owners to Tenants in Common.

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