WETs, PETs and CLTs: Part 1

"Inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue." With these famous words in 1986, Roy Jenkins wanted to highlight the importance of estate planning, and how this can mitigate the levy payable upon death.

These series of blog posts will look into the various estate planning options available to UK residents, and some of the considerations which must be kept in mind when deciding on the best course of action.

We will start with the easiest ways to reduce IHT - WETs. WETs, or Wholly Exempt Transfers, are those transfers which are always exempt from any form of inheritance tax.

WETs can be broken down into 2 categories, namely the types of gifts , and secondly, the recipients of these gifts.

When looking at the first category, there are certain gifts which are exempt from inheritance tax (IHT). Common gifts falling into this category include the annual exemption (£3000), which can be accumulated and carried forward for maximum 1 year (i.e. combined annual exemption of £6,000). Small gifts, to a total value of £250 can be given to as many people as one wishes, however, it cannot be used in combination with any other exemptions.

Wedding gifts are another great way to gift amounts of money. Parents can gift £5,000 each, grandparents/great-grandparents can gift £2,500 (as can one party of the wedding to the other party), and all other people can gift up to £1,000. It is important that the gifts are made before or at the time of the wedding, otherwise they may be disregarded. Interestingly, parents can therefore gift up to £24,500 to their children as wedding gifts. This is made up of 2 wedding-gift exemptions (one for each parent - £10,000), as well as both parents annual allowance for the current year, and past year, a total of £12,000. Finally, thy can also gift £2,500 to the other party of the wedding, totalling £24,500. If parents from both the groom and bride follow this strategy, almost £50,000 can be gifted and is totally exempt from any inheritance tax.

Another, less common gift, is regular gifts made out of surplus income. If such gifts do not diminish the quality of life for the donor, and the gifts are made out of income which is surplus, then these are also exempt from any IHT.

Finally, and only until 2027, unused pension pots which are left to beneficiaries are excluded from any inheritance tax purposes. However, this is only passable upon death and so no lifetime gift can be made on any pension benefits.

The second category of wholly exempt transfers (WETs), are those which are gifts to certain individuals/institutions. Gifts to the following people/entities are wholly exempt from any inheritance tax.

• Gifts between spouses/civil partners

• Gifts to charities

• Gifts to institutions of national interest (National Trust, museums, universities, etc)

• Gifts to political parties (note, this must be a UK political party, and must have 2 members in the house of commons, alternatively, a single seat in the house of commons but with a minimum of 150,000 votes in the most recent elections.

As you can see from the above, there are many wasys how making (relatively) small gifts can be ustilised to reduce one's estate, whilst not giving rise to any inheritance tax liability. These WETs are the easiest way to reduce any IHT liability, however, as is apparent, they are rather limited in size.

For more meaningful transfers, we need to look at the next strategy in reducing one's estate, PETs (potentially exempt transfers).

Check back next week for the next post in this series to learn more about PET's, taper relief, and the payment of any IHT liabilty - should this fall due.