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This could save a married or civil partner clients £4,800 in IHT per year

18 March 2019

This tax exemption may be overdue a review but it is still a useful tool when tax planning, says the Prudential technical team.

It is currently £3,000 and has remained unchanged since April 1981 – back when Shakin’ Stevens was at number one in the UK singles chart with ‘This Ole House.’

The Chartered Institute of Taxation consider it should be increased (£10,000 has been mentioned) – to be indexed to a rounded figure or linked, for example to the income tax personal allowance or capital gains tax annual exemption.

What am I referring to? The Inheritance Tax Annual Exemption, and, regardless of its age, it shouldn’t be overlooked.

Basically, a client’s lifetime transfers (gifts) are exempt up to a total of £3,000 in each tax year.

These planning points immediately spring to mind.

Loan Trust – waivers of outstanding loan

Remember that a loan trust will allow a client access to original capital but the growth accrues outside of the estate. Nice, conservative, IHT planning.

The outstanding loan remains inside the client’s estate for IHT purposes and therefore it is IHT efficient for clients to take part repayments of the loan (typically via 5% tax deferred withdrawals) and spend those funds.

Alternatively, clients who wish to gently reduce their IHT exposure can waive £3,000 of the loan per year to utilise the annual exemption, without disinvesting from the bond. These waivers will increase the amount available for the beneficiaries whilst reducing the client’s IHT exposure.

For those wishing to forego larger chunks of the loan, then the waivers will be Potentially Exempt Transfers (PETs) for an absolute loan trust or Chargeable Lifetime Transfers (CLTs) for a discretionary loan trust.

Ask your insurance company if it offers a standard ‘Deed to waive a loan’.

Pension contributions for family

Where a contribution is made to someone else’s pension (i.e. family member) that is a gift for IHT purposes and exempt within the £3,000 annual exemption. This can be an effective way for the donor to reduce their taxable estate while saving into a pension for someone else. A

dditional benefits are that basic rate relief at source from HMRC will effectively increase the gift by 25% and an adult recipient may benefit from a reduction in their tax bill if they pay tax above basic rate. For larger pension contributions in favour of others, then the normal expenditure out of income exemption may be considered.

See also our article on expenditure out of income.

Gifts larger than £3,000

Gifts do not need to be constrained to £3,000 to utilise the exemption. If a gift is more than £3,000 then it is an exempt transfer up to the amount of the available exemption and the excess is the chargeable amount of the PET (outright gift) or immediately chargeable transfer (gift into discretionary trust).

Carry forward of unused allowance

Any part of the annual exemption which is not used in the tax year is carried forward (rolled-over) into the following tax year. It can only be carried forward to the next year and cannot be used in any later years. The annual exemption is applied in the following order

• current year

• any part of the previous year’s annual exemption not used in that year

Doubling up

A client who has not carried out any previous IHT planning will currently have £6,000 of annual exemption available.  In total, a married couple or civil partners could have £12,000 meaning that a combined 40% IHT saving of £4,800 is immediately up for grabs.