Inheritance Tax 
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Chargeable Lifetime Transfers & Potentially Exempt Transfers
Welcome to DYW Tax Tips. This page summarises some of the most effective tax avoidance planning tips.
- Take Advice
You may need to consult a financial adviser with regards to your assets and planning for inheritance tax avoidance. Make sure that you are absolutely satisfied with any financial advice that is given as legal documents such as life assurance policies in addition to the planned will and testament will be drawn up on reliance of the advice given.
It is imperative that if there is anything in the advice given that you are unclear about, then go back to the advisor or seek a second opinion or clarification. A vast sum of money might be invested and you need to be sure that you understand the full implications.
- Exemptions
The government limits how much you are able to give away without affecting your inheritance tax position. The exemptions are quite numerous and should be taken full advantage of whenever possible.
Annual Exemption
Inheritance Tax Tip
Set up Building Society accounts/savings accounts in the sole names of children or intended beneficiaries and start making payments into them with the view to utilising your annual £3,000 allowance.
Every individual has an annual exemption of £3,000 and it can be brought forward a year if not used (making £6,000 in total). Whilst not very large, it is a valuable tax planning tool & ought to be utilised. A married couple who make effective use of this exemption during the last years of their lives could save up to £20,000 in inheritance tax.
- Cohabitees
Transfers between married couples/civil partners are totally exempt of inheritance tax. The same does no apply to cohabitees. If therefore, you intend to leave most of your estate to a common-law partner, try and get married before you die: "deathbed" marriages have been known to save millions of pounds in inheritance tax.
- Potentially Exempt Transfer Tips
Qualifying as a PET
In order to qualify as a PET as opposed to an immediately chargeable transfer, the transfer of value must satisfy the following:
- There must be an increase in the value of the transferee's estate (person to whom transfer/PET is made)
- Where the transferee is a disabled trust there must be an actual gift of property into the trust.
Any PET which fail to satisfy the above conditions will be considered as chargeable lifetime transfers unless some other exemption can be applied.
How to Make a Gift
If money or an asset is transferred from one party to another, how can you determine if it is a gift, loan or investment that is being made? The solution is to provide a written record when giving the gift. For example, if you plan to gift a sum of money to a friend or relative, enclose a letter addressed tot hat person and state in the letter what is being given and the fact that it is a gift. It is also possible to transfer the inheritance tax burden for that gift to the person to whom you are giving if the other person signs an agreement accepting responsibility.
Anniversary Date for Transfers
The reductions in the amount of inheritance tax paid in relation to transfers made during life occur on the day AFTER the anniversaries of the gift, NOT the anniversary itself.
PET Memorandum
Transfers during lifetime are Potentially Exempt of inheritance tax provided the giver survives 7 years after the date of making the gift. It is vital therefore that a memorandum be kept detailing what was given, to whom and the actual date of the gift.
PETs & The 7 Year Rule
Even where a person does not survive 7 years after having made a gift there is still ample opportunity to save on inheritance tax as soon as after 3 years of giving the gift. So even if you do not think Aunt Bertha will last a whole 7 years it is still worth encouraging her to make some tax saving gifts.
Term Insurance for PETs
A 7 year decreasing term insurance can be taken out to cover the potential tax bill on a PET.
- ISAs
Many people assume that tax-advantaged products such as ISAs and PEPs are exempt from inheritance tax because they are supposedly "Tax Free". This is not the case and ALL assets have to be included into your estate regardless of their Income Tax or Capital Gains Tax treatment.
- Volatile Assets
When receiving gifts of any assets which are volatile i.e. shares, it is wise to do this through the medium of a Trust so that it will later become possible to reduce any inheritance tax liability which might arise if the value of the asset has fallen.
- Purchasing Property
If purchasing property as a couple, make sure you hold the legal title as Tenants in Common as opposed to Joint Tenants. TIC title allows more flexibility when leaving property in a Will. See Wills, Property Ownership & Declarations of Trust
- Items of High Value
If you can afford to do so, give away things which are of high value and which will continue to appreciate. Rather than simply swelling the size of your estate which inheritance tax will accrue on, in the increase in value will benefit the person to whom you give the gift instead.
- Invest in AIM Stock Market Shares
See 'Take AIM and cut your IHT bill' for further details.
- Life Insurance Policies
Premiums could be paid using lifetime exemptions hence no tax charged, or the policy could be taken out to benefit somebody else. The policies do not form part of the estate and therefore attract no inheritance tax. This is ONLY IF THE POLICIES DO NOT PAY INTO A TRUST.
If the policies pay into a trust and the payouts exceeds the nil rate band then inheritance tax will be charged on the payout at 6%.
The way around this is to take out life insurance policy and pay the first premium, then sign over the policy to someone else, i.e. children and give them the money to pay all future premiums. This will prevent the policy from being part of the estate.
- Business Property Relief
To qualify for this relief, the transferor needs to have owned the property for 2 years prior to the date of the transfer. The value transferred of business property may be reduced by 100% or 50% depending on the category of property concerned.
100% reduction available for transfers of:
50% reduction available on transfers of:
A business or an interest in a business
Land, building machinery or plant owned by the transferor and used immediately before the transfer for the purposes of a company controlled by him or in a partnership.
Unquoted shares or securities
Shareholdings giving control of quoted companies
Transfers and PETs of business property made within seven years before the transferor's death will qualify for Business property relief at the time of death, provided the transferee still owns the original property at the time of the transferor's death and the property remains business property.
