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Tax deductions & exemptions

Deductions

Funeral costs and debts are considered deductible from the inheritance tax due on an estate.

Tax-free Gifts

Certain gifts fall into the tax exempt category, depending on the situation.

1. Gifts given to a spouse. Generally tax exempt, except in certain cases:
   • If the giver lives in the UK and the spouse is residing abroad (the tax exemption may vary).
   • If the gift is not immediately in favour of the spouse.
   • If the bequest depends on a condition not met within a year. (Surviving the donor does not grant an exemption from the condition or set of conditions.)
2. Donations in cash or in kind given to an established institution in the UK
3. Donations to specific institutions such as a national museum, university or the National trust.
4. Contributions made to a political party recognised and represented in the House of Commons.
5. National heritage property and land bequeathed to an appropriate non-profit organisation or Housing Association:
   • The National Gallery
   • The British Museum
   • The National Museums of Scotland
   • The National Museum of Wales
   • The Ulster Museum
   • The Historic Buildings and Monuments Commission for England
   • The National Trust for Places of Historic Interest or Natural Beauty
   • The National Trust for Scotland for Places of Historic Interest or Natural Beauty
   • The National Art Collections Fund
   • The Trustees of the National Heritage Memorial Fund
   • The National Endowment for Science, Technology and the Arts (with effect from 2 July 1998)
   • The Friends of the National Libraries
   • The Historic Churches Preservation Trust
   • The Nature Conservancy Council for England
   • The Nature Conservancy Council for Scotland
   • The Countryside Council for Wales
   • Any other similar national institution, which exist wholly or mainly for the purpose of preserving for the public benefit a collection of scientific, historic or artistic interest and which is approved for the purposes of this Schedule by the Commissioners Inland Revenue
   • Any museum or art gallery in the United Kingdom which exists wholly or mainly for that purpose and is maintained by a local authority or university in the United Kingdom
   • Any library the main function of which is to serve the needs of teaching and research at a university in the United Kingdom
   • Any local authority
   • Any Government department (including the National Debt Commissioners)
   • Any university or university college in the United Kingdom
   • A Health Authority, National Health Trust or similar health service body, within the meaning of section 519A of the Income and Corporation Taxes Act 1988

(Source: Schedule 3 Inheritance Tax Act 1984.)

Note: If the terms surrounding the bequest are incomplete or conditional (or if the gift can be used in the future for non-charity or non-exempt purposes), then the gift is not considered tax exempt.

Exempted Gifts

Some types of gifts are not to be added to the value of an estate when assessing the estate’s value for tax purposes.

• Wedding gifts of up to £5,000 to each of child of the deceased (including step-children and adopted children) or the person that child is marrying
• Wedding gifts up to £2,500 to each grandchild or the person that the grandchild is marrying
• Wedding gifts of up to £1,000 to anyone else
• Payments for the maintenance of spouse of the deceased, or ex-husband or ex-wife, dependent relatives and, usually, children who are under 18 or in full-time education
• Other gifts up to a value of £3,000 in any one tax year, plus any unused balance of £3,000 from the previous tax year (The tax year starts on 6 April in one year and ends on 5 April in the following year.)
• Outright gifts in any tax year up to a total of £250 each to any number of people, but only if the total of all gifts made to the recipient in the same tax year does not exceed £250.

(Source: Schedule 3 Tax Inheritance Act 1984)

In the case of gifts that fall into more than one of the categories listed above, the exemption still applies and they will not be included when calculating the value of the estate.

How a Gift is Valued for Inheritance Tax

A gift is valued for the purposes of inheritance tax by determining the amount of “loss to the estate.” This is calculated according to the estate’s value before and after the gift was given. While this is straightforward in the case of cash gifts as the loss is the same as the amount of the money given, the amount of loss to the estate is worked out differently in the case of other types of gifts.

For instance, you own a set of three sculptures worth £1,000,000 but each piece by itself is worth only £300,000. If you gave one of the pieces as a gift, the value of the sculpture for inheritance tax purposes is not £300,000. Here is why: Prior to the gift your estate included the set of sculptures valued at £1,000,000. After the gift you are left with two pieces worth £300,000 each or £600,000 for both.

Thus, the value of the gift (for inheritance tax) is £400,000 as this more accurately reflects the “loss to your estate” due to the gift.

Taper Relief

Taper relief is a special relief available on the tax charged for gifts. This is given if the total tax value of all the gifts is greater than the tax threshold. (Applied to gifts given between 3 and 7 years before the estate owner’s death.)

Taper relief lessens the amount of tax payable but does not lower the chargeable value of the gift.