Slide 1
Practical Solutions and
value-for-money
service

Practical Solutions and value-for-money service

Slide 1
Practical Solutions and
value-for-money
service

Practical Solutions and value-for-money service

Inheritance Tax and Lifetime Gifts

Most people have heard of Inheritance Tax (IHT) and know that it is a tax that is paid when someone dies and passes their assets on to their family and friends. Not everyone is aware how the tax is calculated, how much tax is paid and even whether or not their own estate is likely to be taxed on their death. If you don’t know this, you are unlikely to be aware of the steps you could take to eliminate or minimise IHT so that you pass on as much as possible of your estate when you die. IHT is an important source of revenue income for HMRC at the moment bringing in just under £3 billion on estates passing on death in the last year. Given that revenue from other taxes has been reduced by the economic situation it is very unlikely that there will be any reform to reduce the potential tax burden for most people in the foreseeable future.

Much of this IHT income does not come from the super wealthy; it comes mostly from the estates of ordinary people who did not consider themselves to be wealthy and were unaware that their estate would be liable to IHT on death and either chose not to or failed to do anything to limit the IHT payable when they died.

It is possible to give away assets in your lifetime in a managed way to reduce or eliminate the amount of IHT payable when you die. This does have to be done carefully; in some circumstances IHT is  payable on the value of gifts and transfers of assets during a person’s lifetime or  sometimes gifts made by someone in their lifetime might still have to be brought into the IHT calculation when that person dies. Some gifts of assets may be entirely free of IHT because of the type of property given away or because of who has received the gift.
How do you work out what IHT is payable when somebody dies?

As a general rule, when somebody dies they may leave assets with a total value of up to £325,000 (the nil rate band) without paying any IHT. Anything above this level is charged to IHT at 40%. So, somebody leaving an estate of £425,000 would have to pay tax on the £100,000 above the nil rate band threshold. The rate of tax is 40% so there would be an IHT bill to pay of £40,000. A married couple or civil partners each have a nil rate band which is transferable, so that on the death of the second of them to die they can leave up to £650,000 without any Inheritance Tax being due. These are not very high thresholds when people consider the value of their houses, savings and investments and so on and many people who do not consider themselves to be particularly wealthy might nevertheless find that their estates will pay significant amounts of Inheritance Tax when they die.

Lifetime gifts

It is possible for someone to give away an asset in their lifetime whether it is a sum of money, shares or investments or a property, and no matter what the value of the gift, there will be no IHT payable  so long as the person who made the gift lives for seven years after the date of the gift. These gifts are called “Potentially Exempt transfers” (PETs) and can be a good way of saving IHT. There are of course conditions applicable; the gift must be absolute and irrevocable and the person making the gift must not continue to get any direct or indirect benefit from the asset given away.

If the person making the gift dies before the seven years are up, the value of the asset given or some of it will be added back to the estate for the purpose of the IHT calculation on death. So long as the person making the gift lives for at least 3 years there will be a saving of IHT and the saving will increase for every year of survival after that until finally at the end of the seventh year no IHT will be payable at all.

Some types of property given away as lifetime gifts may be given free of IHT or at a reduced rate of tax, regardless of whether or not the person making the gift lives for another 7 years. These are in very general terms;

  • Agricultural property and Business property.

Agricultural property can be agricultural land, buildings, stock and equipment. Farmhouses can also qualify for full or partial relief from IHT. Business property can be the business of a sole trader or a share in a partnership or it can be the shares in a private limited company. Land and buildings used in a business can qualify for relief at either 50% or 100% of their value. Some farming businesses can qualify for agricultural property relief and business property relief but the relief will only be given once. Businesses which comprise letting out property for rent whether commercial or domestic are regarded as investments and so do not qualify for relief.

  • Gifts to UK registered charities
  • Gifts to some UK political parties
  • Gifts between spouses and couples in civil partnerships
  • Gifts to some national institutions  for example,  museums, universities, the National Trust

There some other very important gifts that can be made without the need for the person making the gift to survive for more than 7 years;

  • Normal expenditure out of income

Everyone can give as much of their surplus annual income away as they wish and for those with high incomes and low outgoings this can be a useful tool to prevent excess income accumulating and turning into capital which is then subject to IHT on death. To qualify for this exemption you have to be able to demonstrate that any money that you give away is well within your surplus income and does not affect your standard of living, and there has to be a regular and recurrent pattern of giving, for example, paying a grandchild’s school fees.

  • Small gifts to any one person

You can give up to a maximum value of £250 to as many individuals as you wish during any tax year.  The £250 maximum per individual is a strict requirement. If you give anyone more than this amount, for example £300, the whole gift would no longer qualify for the exemption and not just the amount over and above £250.

  • Marriage/civil partnership gifts

On marriage or civil partnership, parents can give their children up to £5,000 and grandparents and great-grandparents can give up to £2,500.  This exemption will only apply if the gift (or the promise of the gift) is given on or shortly before the ceremony.

  • Annual exemption

Everyone can give away a total of up to £3,000 IHT free each tax year and also carry forward any unused portion of this to the next tax year.  Individuals who have never made use of the annual exemption, would, for instance, be able to make a gift of £6,000 in one tax year and then £3,000 every following year.  With a regular pattern of gifting this can add up to a significant amount for example over 10 years this could amount to £30,000 without any tax consequences at all.

There are some gifts that would be immediately chargeable to IHT whenever they are made notably transfers into trusts of more that £325,000 by any individual. Any such transfers would be immediately chargeable to IHT at a rate of 20% on the value over £325,000, and, if the person making the transfer dies within seven years, the remaining 20% would also become payable. It is also important to bear in mind that even though a lifetime gift might save IHT in the long run, gifts of some types of assets such as shares and property might result in a charge to Capital Gains Tax.

If you are concerned that you might have an IHT problem it is worthwhile taking some advice about the steps you could take to mitigate your liability. Lifetime tax planning is complex and it is easy to make a mistake that could be costly. If you are concerned that you do have an IHT problem and would like to discuss ways of mitigating your liability you are welcome to speak to Pamela Horobin. Appointments can be arranged at either our Windermere or Ulverston offices.


Whilst we have made every effort to ensure the accuracy of the information given in this information sheet, this information is provided for general information purposes only and no warranty or representation is made as that the information is completely free from errors or inaccuracies. Specific legal and tax advice on this topic will vary according to individual circumstances and should be sought in every case. Any advice given in this sheet does not constitute legal or tax advice and shall not without our express written consent in each individual case be relied upon by any person.

Directors’ Duties

The recent changes to the law on directors’ duties was well publicized. The Companies Act 2006 included a ‘statutory statement’ of duties which, by October 2008, became the basis of the law.

The new Act sets out seven duties which are designed to set the old law in stone.

In short, these are that directors must (1) act within their powers; (2) promote the success of the company; (3) exercise independent judgment; (4) exercise reasonable care, skill and diligence; (5) avoid conflicts of interest; (6) not accept benefits from third parties; and (7) declare all interests in proposed arrangements.

On the face of it, these criteria appear to mirror the old regime but there are some significant changes. In particular, the 2006 Act appears to move the goalposts in terms of defining the ‘interests’ of a company. Traditionally, acting in the company’s (i.e. the shareholders’) interests simply meant maximizing wealth. The new Act requires that, directors must “…promote the success of the company for the benefit of its members as a whole”. The Act goes on to say that, in doing this, directors must have regard to:- (a) likely long term consequences; (b) the need to foster business relationships with suppliers and customers etc; (c) the desirability of maintaining a reputation for high standards of business conduct; (d) the need to act fairly as between the members of the company; (e) the impact of the company’s operations on the community and the environment; and (f) the interests of the company’s employees. The principle has been dubbed ‘enlightened shareholder value’ and recognises that directors must take into account the effects of their decisions on any persons that may be affected by a company’s activities.

This creates uncertainty which is aggravated by the Act stating that the list is non-exclusive and that ‘other’ criteria must be considered. If directors fail to have regard to these criteria then they may be in breach of duty. Having to demonstrate regard to all relevant criteria also creates a significant bureaucratic burden; slowing down the decision-making process and arguably affecting the primary function of a business, generating income.

The potential problems created by the new law are unknown. Whilst it is widely accepted that companies are free to invest in a corporate responsibility programme as a means of raising profile, should it follow that directors are in breach of duty for failing to consider whether or not to invest in one? The Courts in 2009 even suggested that it may be reasonable to expect an employer to take into account the interests of the employees (when determining business need) even in a redundancy situation.

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