SPONSORED: A sigh of relief - Utmost Wealth Solutions

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When discussing lifetime inheritance tax (IHT) planning, the more complicated trusts and IHT mitigation schemes available in the market can play an important role in a well-rounded approach to that planning.

However, to ensure IHT planning is carried out efficiently, it's important to also consider the various IHT exemptions and reliefs that are available and whether these can be utilised. Simon Martin, pictured below left, Technical Services Manager at Utmost Wealth Solutions, discusses some exemptions 

​​​​​​​The annual exemption
- s19 IHTA 1984

The IHT annual exemption is currently £3,000 per annum and, if it has not been used in a previous tax year, it can be carried over one tax year with the current year's

allowance utilised first. If the annual exemption is not utilised in the tax year, or the following tax year, it is wasted. Making use of a client's annual exemption each year is therefore a very simple strategy to reduce exposure to IHT.

“Gifts which are made out of a person’s surplus income are exempt if they are regular and the transferor is left with sufficient income following the gift to maintain their standard of living” - Simon Martin, Utmost Wealth Solutions

The annual exemption is allocated to lifetime gifts in chronological order, i.e. in the order in which they are made. It is also important to understand that the annual exemption is still notionally allocated to potentially exempt transfers (PETs) such as lifetime gifts to children, even though such gifts are not chargeable to IHT at the time of transfer.

For this reason, when making both PETs and chargeable transfers in the same tax year, chargeable transfers should be ideally made first to reduce any potential immediate charge to IHT. If a PET is made first then this will effectively waste the exemption if the donor survives the seven years that are needed for the gift to fall out of cumulation. This can be important where the settlor is considering the use of trusts and making gifts in the same tax year.

The spousal exemption
- s18 IHTA 1984

Transfers between married couples or civil partners are fully exempt. However, where the transferee is a non-UK domiciled the exemption is limited to £325,000. This limit was altered, amongst other changes, in the Finance Act 2013 and some readers may recall the previous limit was just £55,000. A non-domicile may make an election to be treated as UK domicile for the purposes of IHT under s267ZA IHTA 1984 and this election can be back-dated by 7 years (although currently restricted to 6 April 2013 when the changes came into place). The election can also be made within 2 years of death by the Personal Representatives (PRs). The election once made is irrevocable although would fall away once the person becomes non-UK resident for four consecutive tax years.

This election may be very useful if the UK domiciled spouse/civil partner has significant wealth as it would allow the couple to equalise their estates. Following death, the use of the election may also be favourable for a non-UK domiciled individual - especially where they may be intending to permanently leave the UK anyway, thus ‘shaking off' their election.

Gifts for the maintenance of family - s11 IHTA 1984

Another exemption that is quite interesting is the gifts for maintenance of family under s11 IHTA 1984. Any gifts that are made for the ‘maintenance' of a family member can be fully exempt. This would include gifts made for the maintenance of a person's spouse or civil partner. It could also include gifts for the maintenance, education and training of a dependent child (including an illegitimate child, step child or adopted child).

Furthermore, gifts made for the care and maintenance of a dependent relative are also covered under this exemption. You may note here that this exemption is slightly different when applied to a dependent relative, as it introduces the concept of care and maintenance s11(3) IHTA.

Definitions of "maintenance" and "care" are not actually given in the legislation itself but HMRC practice notes do provide some additional commentary. They state that maintenance can be considered as "maintaining the beneficiary in the condition of life which is appropriate to a dependant of the transferor".

This would include, for example, paying for the food and clothing of a child. They also confirm that, for the purposes of the providing care and maintenance for a dependent relative, "care" would include providing reasonable provision for care services whether privately or in an institution.

This would suggest reasonable payments to cover care home costs would perhaps be within scope of s11 - although this is clearly quite a subjective point!

Gifts not intended to confer gratuitous benefit - s10 IHTA 1984

Clearly, just spending money is a simple way of reducing your estate. Transactions between ‘unconnected' parties are not considered to be transfers of value.

For example, if a person buys a speedboat from someone else then this would simply be a commercial transaction with no associated gift - i.e. the person gives cash and receives the speedboat in return (and perhaps a Bullseye tankard and some darts under the seat?!).

Where persons are deemed ‘connected' then the transaction must be at arms-length; that is to say the monies transferred must reflect the open market value. Any difference between the amount exchanged and the true commercial value would be considered to be a transfer of value if it is in excess of any annual exemptions.

Small gifts exemption
- s20 IHTA 1984

Unlike some of the other exemptions, this is a ‘stand-alone' exemption. In other words, it cannot be used in conjunction with other exemptions, such as the annual exemption or gifts in consideration of marriage exemption. Under this exemption a person is able to make transfers of up to £250 a year to any number of people and they are fully exempt.

However, if the gift exceeds £250 then the relief is not available. This exemption could be quite useful for grandparents as it can allow them to make gifts to all their grandchildren each year. For example, if a person had 10 grandchildren then they could gift £2,500 each year under this exemption alone.

Gifts to charities, registered clubs, political parties, housing associations or for national purpose - s23-25 IHTA 1984

There are numerous exemptions in IHTA 1984 for gifts to various types of organisations. These can be very useful, but it's very important to make sure the gift qualifies under the relevant section.

The case of Arron Banks demonstrates this quite well. Arron Banks made a significant donation to UKIP in the tax year 2014/15 and claimed this was exempt under s24 IHTA 1984 - i.e. it was a gift to a "political party". HMRC argued that this failed the definition under s24(2) which required that at the last general election either: at least two members were elected to the House of Commons; or one member was elected to the House of Commons and not less than 150,000 votes were given to candidates who were members of that party.

At the time UKIP had two MPs but both had been elected in bi-elections - so the test had failed. A case was filed on the grounds of human rights but the case was rejected.

The court was not able to re-write legislation and, whilst the drafting was perhaps dated, updating this is a matter for parliament not the courts.

Regular gifts out of income exemption -s21 IHTA 1984

Gifts which are made out of a person's surplus income are exempt if they are regular and the transferor is left with sufficient income following the gift to maintain their standard of living.

This exemption is often discussed by advisers and can certainly be of significant benefit when considering IHT planning.

Under this exemption people with significant excess income can potentially gift this income away each year and thus reduce their exposure to IHT.

However, where this exemption is used for significant gifting the estate will not qualify as an ‘excepted estate' whereby only a short IHT form (IHT205) is needed.

In other words, the PRs on death will need to fill in the longer IHT400 death form. Here they will need to use form IHT403 to detail any gifts made prior to death including gifts made using this exemption which exceed £3,000 p.a. As a result, the PR's may need to be able to evidence any information provided on form IHT403 if questioned by HMRC so clearly accurate records would need to be kept on both the gifts themselves and the spending pattern of the transferor. Otherwise, should this exemption be challenged, it may be rather difficult for the PR's to demonstrate the very subjective third arm of the test, i.e. that the transferor was left with sufficient income to maintain their standard of living.


Various other reliefs are available to reduce the IHT liability on gifts made during lifetime. These include relief for transfers in respect of either business property or agricultural property. Relief here can be as high as 100% of the value transferred and thus it is important to make sure, where possible, the transfers are made to otherwise chargeable persons or into trusts where the transfer is considered a chargeable transfer for IHT purposes. Where business property is transferred to, say, a UK-domiciled spouse, business property relief may effectively be wasted as this could have otherwise qualified as an exempt transfer under the spousal exemption.

While appropriate consideration of the various reliefs may address the IHT concerns of many, there are other options, including trust-based arrangements, that can help mitigate IHT beyond the scope of the reliefs. Help is available in the market to assist with these more complex scenarios.