Will my gift over £3,000 per year incur inheritance tax?
16 July 2019
Question by PB
Hi, just thinking on the morbid side of life. Over the past few years I have put the full allowance into my daughter's JISA (usually in one or two lump sums each year). If for some reason I passed away, would the amount over £3,000 per year be liable for inheritance tax? Thanks.
Answered by Boring Money
Thanks for your question. Although it can be uncomfortable, it’s really important to plan ahead and think on the ‘morbid side of life’.
It's important to think on the ‘morbid side of life’
Great to hear you are building assets for your daughter and using the valuable Junior ISA allowance (£4,368 for 2019/20).
The £3,000 you refer to is the annual gift exemption.
This means you can give away assets or cash of up to £3,000 each year, without the value being added to your estate for Inheritance Tax purposes (IHT).
You are able to carry forward any unused gift exemption from the previous tax year (i.e. if you did not make any gifts in the previous tax year, you could make £6,000 of gifts in the current tax year within your exemption).
Any unused exemption can only be carried forward one year before being lost.
As you rightly say, any amounts over this £3,000 annual gift exemption could become liable to Inheritance Tax.
It may be that there are other exemptions that can be used to reduce the value of gift subject to Inheritance Tax. For example, if you are fortunate enough to be in a position where you have surplus income, you can make gifts from surplus income without any Inheritance Tax implications. The rules around gifts from surplus income can be complex; you must be able to maintain your current standard of living, and any gifts must be regular. As with all gifts, it’s really important you keep an accurate record of these.
Gifting more than £3,000
If you don’t have surplus income, gifts over the £3,000 exemption would be a potentially exempt transfer (PET) for Inheritance Tax purposes. The good news is any potentially exempt transfers will be exempt from Inheritance Tax, and no longer form part of your, estate if you survive the gift by 7 years.
If you do not survive the gift by 7 years, the value of any failed potentially exempt transfers are added to your estate for Inheritance Tax purposes.
Inheritance Tax: the nil rate band
As you might be aware, each individual (assuming you are UK tax resident and domiciled for tax purposes) will have an Inheritance Tax nil rate band (NRB) currently £325,000. Assuming your nil rate band has not been used elsewhere, any failed potentially exempt transfers will use up your nil rate band in the first instance.
For example, if on your death you had failed potentially exempt transfers of £25,000 (to keep the numbers nice and simple), these would use up the first £25,000 of your nil rate band . You would therefore have £300,000 of your nil rate band available to offset against the remainder of your taxable estate (i.e. your home or other savings and investments which form part of your estate for Inheritance Tax purposes).
Once your nil rate band is used in full, any chargeable estate over this amount would be subject to Inheritance Tax at 40%.
Ultimately, assuming you have your nil rate band available, and the failed potentially exempt transfers are less than £325,000 in total, no Inheritance Tax will fall due on these gifts, but they will use up a portion of your nil rate band. In the event you have failed potentially exempt transfers over the value of your nil rate band , these will be taxable.
However, for failed potentially exempt transfers that have been survived by 3-7 years, the rate of Inheritance Tax due reduces from 40% on a sliding scale (until ultimately no Inheritance Tax is due once the potentially exempt transfer has survived 7 years+).
The morbid side: tidying up your estate
Without wanting to dwell on the morbid side, there are some basics you should do to make sure the administration of your estate is more straightforward for your executors.
Firstly, you should make sure you have a valid will to ensure your assets are distributed in accordance with your wishes.
Secondly, as detailed above, you must make sure you keep an accurate record of all gifts you make for Inheritance Tax purposes so the relevant reliefs can be claimed.
Finally, you should make sure any pension nomination have been updated to make sure any death benefits go to your chosen beneficiaries.
Estate planning can be complex and you may want to seek legal or estate planning advice to consider all the intricacies in more detail.
The tax treatment detailed above depends on an individual’s circumstances and may be subject to change in the future.
Hope this helps