Understanding Inheritance Tax on Gifts in the UK

Question from h, Understanding Inheritance Tax on Gifts in the UK

Answer from AI:

Inheritance tax in the UK can be a complex area, especially when it involves gifts made during a person’s lifetime. The tax implications of such gifts depend on several factors, including the value of the gifts, the relationship between the donor and the recipient, and the timing of the gifts relative to the donor’s death. Here, we’ll explore how the gifts made by Lucy Cavendish during her lifetime would be considered for inheritance tax purposes at the date of her death.

Key Principles of Inheritance Tax on Gifts

Inheritance tax in the UK is governed by rules that consider various types of gifts made during a person’s lifetime. Here are some key points:

• Annual Exemption: Each individual has an annual exemption of £3,000 for gifts, which can be carried forward one year if not used.
• Small Gifts: Gifts of up to £250 per recipient per year are exempt.
• Wedding Gifts: Gifts given on the occasion of a marriage can be exempt up to certain amounts, depending on the relationship to the recipient.
• Charity Gifts: Gifts to registered charities are exempt from inheritance tax, regardless of the amount.
• Potentially Exempt Transfers (PETs): Gifts to individuals that exceed the annual exemption may be considered PETs and can become exempt from inheritance tax if the donor survives for seven years after making the gift.

Calculating Lucy Cavendish’s Cumulative Total for Inheritance Tax Purposes

Given the information provided about Lucy Cavendish’s gifts:

1. June 2016: £20,000 to Oxfam, a registered charity.
2. July 2018: £50,000 to her son, Charles, on his marriage.

Analysis:

• The £20,000 gift to Oxfam is exempt from inheritance tax because it is a gift to a registered charity.
• The £50,000 gift to her son, Charles, on his marriage would be partially exempt. The exemption limits for wedding gifts depend on the relationship between the donor and the recipient. For a parent, the exemption is up to £5,000. Therefore, £5,000 of this gift would be exempt, leaving £45,000 potentially subject to inheritance tax.

However, if Lucy survived for more than seven years after making the gift to her son, the entire amount would become exempt as a Potentially Exempt Transfer (PET). Since Lucy died in September 2022, and the gift was made in July 2018, the gift does not meet the seven-year rule and is therefore included in the cumulative total for inheritance tax purposes.

Conclusion

Based on the information provided and the rules governing inheritance tax in the UK, the cumulative total of Lucy Cavendish’s gifts for inheritance tax purposes at the date of her death would be:

[C] £45,000

This total includes the £50,000 gift to her son, Charles, minus the £5,000 wedding gift exemption, as the gift to Oxfam is entirely exempt.

It’s important to note that inheritance tax rules can be complex, and various factors can affect the tax implications of gifts. Individuals should consult with a legal professional for personalized advice. For more information on inheritance tax and exemptions, visit the UK Government’s Inheritance Tax guide.

Remember, this explanation is provided for informational purposes and should not be considered legal advice.