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What Are Exempt Beneficiaries in Probate?

3rd September 2018

By Trainee Solicitor, Abbie Tolman

There are certain people or organisations that you are able to leave gifts to after you die without them being liable for Inheritance Tax. These people and organisations are referred to as exempt Beneficiaries. Examples of exempt Beneficiaries include your spouse or civil partner and registered charities. Certain gifts made to other people may also be exempt from Inheritance Tax.

For free initial advice and guidance call our Probate Advisors on 03306069584 or contact us online and we will help you.

Inheritance Tax Threshold

Inheritance Tax is the tax due on the value of an Estate of someone who has died. However, there is usually no Inheritance Tax to pay if the value of the Estate is below the Inheritance Tax threshold, which is currently set at £325,000 (for the 2018/19 tax year). This threshold is known as the nil rate band. Usually, anything over the nil rate band will usually be subject to a 40% Inheritance Tax liability.

For more information, see Why Probate is Not Required on a Small Estate.

Exempt Beneficiaries

Gifts made to certain people and organisations both during your lifetime and from your Estate after your death may, however, be completely exempt from Inheritance Tax. This is the case when the person or organisation is classed as an 'exempt Beneficiary'.

Gifts to the following people/organisations are exempt from Inheritance Tax:

  • A spouse or civil partner domiciled in the UK
  • Qualifying UK or EU charities
  • Qualifying political parties
    • A political party qualifies for exemption if it has at least two members that were elected to the House of Commons or has one member elected to the House of Commons and the party received at least 150,000 votes
  • Some national institutions such as universities, museums and the National Trust

Exempt Beneficiaries and the Transferable Nil Rate Band

Gifts made to exempt Beneficiaries do not utilise any of the nil rate band as they are not subject to Inheritance Tax anyway. It is then possible for the unused nil rate band to be transferred to a surviving spouse or civil partner.

For example, say someone leaves their entire Estate to their surviving spouse or civil partner. This would not be subject to Inheritance Tax as it has been left to an exempt Beneficiary. As such it would also not use any of the nil rate band.

On the death of the second spouse or civil partner, the unused nil rate band from their predeceased spouses' Estate can be transferred to their own Estate. Ultimately, this means in this circumstance the nil rate band on the death of the second spouse or civil partner could be up to a total of £650,000 (the sum of their own £325,000 allowance plus the unused £325,000 allowance of their spouse).

With our Probate Complete Service we take full responsibility for getting Grant of Probate and dealing with the Legal, Inheritance Tax, Property, and Estate Administration affairs.

Gifts Made Prior to Death

Gifts made in the seven years before death will also form part of the deceased's Estate and are therefore potentially subject to Inheritance Tax if the Estate exceeds the nil rate band.

A gift is defined as anything of value, such as money, property or possessions. It can also be a loss in value when something is transferred, for example if a parent sold their home, or jewellery, for example, to their child for less than it was worth, the difference in value would count as a gift.

Exempt Gifts

Some gifts can however be exempt from Inheritance tax because of the type of gift or the reason for making the gift. The following gifts will be exempt:

  • Small gifts
    • Gifts are exempt up to the value of £250 to anyone (provided no other exemptions have been applied)
  • Weddings gifts
    • Wedding gifts are exempt up to £5,000 from parents, £2,500 from grandparents and £1,000 from anyone else.
  • Normal expenditure – gifts made out of your regular income (not capital) are exempt providing that you have enough income remaining after the gifts to maintain your usual standard of living. This includes:
    • Monthly or regular payments to anyone
    • Regular gifts made for special occasions such as Christmas, birthdays, wedding/civil partnership anniversaries
    • Regular payments on life insurance policies, for you or someone else
    • Maintenance payments to your spouse or civil partner, your ex-spouse or civil partner, elderly relatives who are dependent upon you or children under the age of 18 or in full-time education (including adopted children and step-children).

Annual Gift Exemption

There is also an annual exemption of £3,000 every tax year, therefore you can give away gifts worth up to this value without them being subject to Inheritance Tax. Any unused exemption can also be carried over from the previous tax year. However you can only carry over unused allowance for one year, after which time it would expire.

Taper Relief

If there is Inheritance Tax to pay on gifts, it will be charged at 40% on non-exempt gifts that were made in the 3 years prior to death. Gifts made 3 to 7 years prior to death are taxed on a sliding scale referred to as 'taper relief' at the following rates:

  • less than 3 years 40%
  • 3 to 4 years 32%
  • 4 to 5 years 24%
  • 5 to 6 years 16%
  • 6 to 7 years 8%

For free initial advice and guidance call our Probate Advisors on 03306069584 or contact us online and we will call you.

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