The Prudential Technical team using a case study to illustrate how this exemption works and the need for careful record keeping.
An individual has an annual exemption for lifetime transfers of £3,000 per tax year. After making use of your current year’s exemption you can also carry forward any unused amount from the previous tax year. Most people who deal with IHT planning are aware of this and the importance of using your available exemptions each tax year, but how the relief is claimed is perhaps less well known. The end of the tax year is the perfect time to ensure your clients have recorded sufficient information to allow this exemption to be utilised against gifts made during the year.
No claim needs to be made by the donor at the time the gift is made. However, on the death of the donor, the personal representatives are required to complete an IHT403 documenting gifts made by the deceased in the 7 years prior to death. Where the gift was covered fully by the annual exemption it doesn’t need to be noted on the IHT403 but if the exemption is being claimed against a larger gift this must be recorded and the following details provided:
- Date the gift was made
- Name of the recipient of the gift
- Description of the gift e.g. cash, number of shares etc.
- Gross value of gift before exemption
- Net value of the gift after the exemption
If the deceased only made one or two gifts in different tax years this should be relatively straightforward to complete however the situation can become more complex where multiple gifts are made in the same tax year.
If the transferor has made transfers to more than one person on different days in the same tax year, then the annual exemption is applied “in date order”.
Case study
On 5 August 2019 James gave £20,000 to his son Jayden.
On 2 September 2019 James gave £8,000 to his daughter Janine.
James died on 1 December 2019.
In this scenario all of the annual exemption is applied against the gift to Jayden made on 5 August 2019 and there is none available to offset against the gift to Janine.
But what happens if the transferor has made transfers to more than one person on the same day?
Mark makes transfers of £10,000 to Charlie and £20,000 to Clare on 3 September 2019.
Mark dies on the 7th August 2025
Where multiple gifts are made on the same day, the annual exemption is apportioned depending on the value of the gifts made to each party. In this particular scenario the Annual Exemption would be apportioned as follows:
10,000 ÷ 30,000 x £3,000 = £1,000 applied to the transfer to Charlie
20,000 ÷ 30,000 x £3,000 = £2,000 applied to the transfer to Clare
Whilst they don’t need to claim the annual exemption at the time it’s used, it’s essential a client keeps a record of all gifts made during their lifetime so that their personal representatives can accurately complete HMRC’s IHT paperwork and make use of this valuable exemption.
HMRC investigate a sample of cases each year and no one wants to have to pay additional tax due to being unable to evidence that certain gifts were not chargeable.
