It is well known that a person making a will or planning their estate can make significant tax savings through the giving of gifts that fall within an exemption to tax or where they are deemed to be potentially exempt transfers (PETs).
Everyone is entitled to an ‘annual exemption’, a threshold within which no tax is payable on any gifts not exceeding £3000 in each tax year (6th April to 5th April). This is one of the more straight forward tax reliefs available, along with transfers between married couples (no inheritance tax is payable if gifts are made between spouses) and those made in consideration of marriage or civil partnership (the thresholds in respect of this type of gift are outside of the scope of this blog).
Dispositions for maintenance of family
One interesting provision, which can escape the consideration of many tax and estate planners, is that dispositions falling within S11 of the Inheritance Tax Act 1984 will escape tax altogether. This is because, instead of qualifying as an exemption to the usual tax rules, they are not considered as transfers and therefore removed from the scope of tax. These include:-
- The maintenance of the other party to the marriage;
- The maintenance, education or training of a child of the marriage, or for an illegitimate child (for a period ending not later than a year from when the child turns 18, or after turning 18 ceases to undergo full-time education or training;
- Provision for the care or maintenance of a ‘dependent relative’ (a relative of yours or of your spouse who is unable to care for themselves due to old age or infirmity).
As can be appreciated, this can substantially reduce the tax burden on large estates. An example of such a disposition could be as follows:-Angela is unmarried with a young daughter (Charlotte) and successfully manages her own business. As such, her estate is estimated to be worth around £1Million. If she were to die and her will simply left the entirety of her estate to Charlotte, she would benefit from her nil rate band (currently £325,000) and the remainder of the estate would be taxed at 40%. Essentially, this would leave a tax bill of £270,000 and Charlotte would receive £730,000. If Angela had settled her assets by way of lifetime transfers that fell within the S11 provisions above, there would be no Inheritance Tax to pay at all and Charlotte would be £270,000 better off. Similarly, had Angela disposed of her assets to pay for the care and maintenance of her elderly mother, she could have reduced her tax liability.This is not an exhaustive explanation of the various different ways in which individuals can benefit from making gifts during their lifetime. Other options, include the individual having to survive the gift for a period of 7 years before it becomes exempt from the general taxation rules (please note that gifts made between 3 and 7 years are taxed on a scale and this is often known as ‘taper’ relief). There are, of course, various rules that apply in these circumstances and, along with any of the above, should only be considered following advice from a professional.
If you do need advice in respect of the planning of your estate or in relation to any transfers that you have made recently (or within 7 years), our dedicated Private Client team are on hand to assist you with any such matters.
Contact Paul Aynsley, solicitor or James Ford, trainee solicitor at MBH Solicitors, to discuss your wills, probate & estate management requirements in confidence at:
www.wigansolicitors.com Tel: 01942 206060 Address: 26 Bridgeman Terrace, Wigan WN1 1TD
Twitter: @MBHSolicitors
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