ACCA ATX ^UK Syllabus A3. Inheritance Tax - Exemptions - Notes ^{1 / 2}

Transfers to spouses

Both spouses UK domiciled

Gifts to spouses (and registered civil partners) are exempt from IHT . This exemption applies both to lifetime gifts and on death.

UK Domiciled spouse transferring to Non UK Domiciled spouse

There is a maximum exemption of £325,000.

Illustration:

Sophie died on 25 June 2024.

On 12 April 2020, she had made a gift of £400,000 to her husband.

Sophie's estate on 25 June 2024 was valued at £900,000. 

Under the terms of her will, Sophie divided her estate equally between her husband and her daughter.

The nil rate band for the tax year 2020/21 is £325,000.

IHT liabilities are as follows:

Lifetime transfers

The gift on 12 April 2020 is exempt as it is to Sophie’s husband.

Death estate

There are a number of other exemptions that only apply to lifetime gifts.

Small gifts exemption

Gifts up to £250 per person in any one tax year are exempt. 

This exemption can not be used to reduce the value of a greater gift.  

For example, a gift of £249 to one person will be wholly exempt, but if the gift is £251 it will be wholly taxable. It is possible to use the exemption any number of times by making gifts to different donees.

Illustration:

During the tax year 2024/25, Peter made the following gifts:

• On 18 May 2024, he made a gift of £240 to his son.

• On 5 October 2024, he made a gift of £400 to his daughter.

• On 20 March 2025, he made a gift of £100 to a friend.

The gifts on 18 May 2024 and 20 March 2025 are both exempt because they do not exceed £250.

The gift on 5 October 2024 for £400 does not qualify for the small gifts exemption because it is more than £250.

The whole amount of £400 will be chargeable unless it can be covered by Peter’s annual exemption for 2024/25 (see the next section).

Annual exemption

Each tax year a person has an annual exemption of £3,000. 

If the whole of the annual exemption is not used in any tax year, then the balance is carried forward to the following tax year. 

However, the exemption for the current tax year must be used first, and any unused brought forward exemption cannot be carried forward a second time. 

Therefore, the maximum amount of annual exemptions available in any tax year is £6,000 (£3,000 x 2).

Illustration:

Simone made the following gifts:

• On 10 May 2023, she made a gift of £1,400 to her son.

• On 25 October 2024, she made a gift of £4,000 to her daughter.

The gift on 10 May 2023 utilises £1,400 of Simone’s annual exemption for 2023/24.

The balance of £1,600 (3,000 – 1,400) is carried forward to 2024/25.

The gift on 25 October 2024 utilises all of the £3,000 annual exemption for 2024/25 and £1,000 (4,000 – 3,000) of the balance brought forward of £1,600.

Because the annual exemption for 2024/25 must be used first, the unused balance brought forward of £600 (1,600 – 1,000) is lost.

The annual exemption is applied on a strict chronological basis, and is therefore given against PETs even when they do not become chargeable.

Illustration:

Nigel made the following gifts:

• On 17 May 2023, he made a gift of £60,000 to his son

• On 25 June 2024, he made a gift of £100,000 to a trust.

The gift on 17 May 2023 utilises Nigel’s annual exemptions for 2023/24 and 2022/23.

The value of the PET is £54,000 (60,000 – 3,000 – 3,000).

The gift on 25 June 2024 utilises Nigel’s annual exemption for 2024/25. The 2023/24 annual exemption is not available as it has been used by the PET.

The value of the CLT is £97,000 (100,000 – 3,000). No lifetime IHT liability is payable because this is within the nil rate band for 2024/25.

Ideally the gift to the trust should have been made before the gift to the son.

Normal expenditure out of income

IHT is not intended to apply to gifts of income. 

Therefore, a gift is exempt if it is made as part of a person’s normal expenditure, is made out of income and that person is left with sufficient income to maintain their normal standard of living. 

To count as normal, gifts must be habitual. 

Therefore, regular annual gifts of £2,500 made by a person with an annual income of £100,000 would probably be exempt. 

A one-off gift of £70,000 made by the same person would probably not be, and would instead be a PET or a CLT.

Gifts in consideration of marriage

This exemption covers gifts made in consideration of a couple getting married or registering a civil partnership. 

The amount of exemption depends on the relationship of the donor to the donee (who must be one of the two persons getting married):

• £5,000 if the gift if made by a parent.

• £2,500 if the gift is made by a grandparent or by one of the couple getting married to the other.

• £1,000 if the gift is made by anyone else.

Illustration:

On 19 September 2024, William made a gift of £20,000 to his daughter when she got married. 

He has not made any other gifts since 6 April 2024.

The gift is a PET, but £5,000 will be exempt as a gift in consideration of marriage and William’s annual exemptions for 2024/25 and 2023/24 are also available. 

The value of the PET is therefore £9,000 (20,000 – 5,000 – 3,000 – 3,000).

This remaining £9,000 will only be chargeable to IHT if William dies before 19/09/2031 (within 7 years of making the gift)

Note:

The marriage exemption is deducted from the value of the gift BEFORE the annual exemptions.