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Excepted estates changes may hit IHT plans, warns Royal London 360°

IFAs should review clients’ IHT mitigation plans due to amendments to the excepted estates rules

Excepted estates changes may hit IHT plans, warns Royal London 360°


One amendment classifies all transfers above the £3,000 annual threshold as potentially chargeable. 

Chadwick said: “Generally, an individual can give away up to £3,000 annually, as gifts. There are other exemptions such as the small gift exemption, gifts in respect of weddings or to charities, but where the amount gifted is not covered by one of these exemptions, it is potentially chargeable to UK IHT.

“However, where it can be demonstrated that gifts not covered by the various UK IHT exemptions are part of a regular pattern of giving made out of surplus income – as opposed to eroding capital – these gifts are also exempt.”

He continued, “Unfortunately, HMRC is now of the view that the exemption can be used inappropriately and, as a consequence, UK IHT is not being paid.”

This means that from 1 March 2011, where a person has transferred over £3,000 a year in the seven years prior to their death, and had considered that amount to be exempt as ‘normal expenditure out of their income’, the amount transferred must be included in the value of that person’s estate to determine what UK IHT return must be made to HMRC.

This is despite the fact that the transfers may actually qualify for the exemption.

Case Study

Mr Smith has given £12,000 to his grandchildren over the last seven years. He dies with net assets of £300,000.

On death, the value of his estate (£300,000) is under the £325,000 nil-rate band.

For deaths prior to 1 March 2011, the additional £9,000 p/a that he gave away would be covered by the ‘normal expenditure out of the income’ rules and, as such, would have been ignored.

As a result, only a short UK IHT return would have been necessary. The short UK IHT return does not require details to be provided for amounts considered covered by this exemption and, as a result, HMRC would not have been aware of the £84,000 given away over the previous seven years.

However, from 1 March 2011 onwards, £9,000 of the £12,000 given annually will be treated as ‘chargeable transfers’, increasing Mr Smith’s estate to £363,000, with the result that a full IHT return would have to be delivered.

The full return will show the total amount gifted and the exemption being applied. HMRC is then in a position to check that the exemption is being applied correctly.


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