In a previous post I discussed, amongst other things, the effect of several allowances for inheritance tax (IHT) being the same today as they were in 1984.

Let’s concentrate on the IHT Marriage Allowance. This is from a real client case that I’ve come across, obviously with details and names changed.

David and Charlotte are getting married and Charlotte’s mum, Elizabeth, decides to pay the cost of the wedding. Elizabeth has used up her Annual Exemptions and Nil Rate Band.

The wedding cost Elizabeth £30,000. For IHT purposes, the first £5,000 of this is not a Potentially Exempt Transfer, per the IHT Marriage Allowance (in my previous post I show that if this had kept up with inflation it would now be £15,480). The remaining £25,000 is a Potentially Exempt Transfer.

Unfortunately, Charlotte’s mum passes away within three years of the wedding. This leaves the happily married couple in a very sticky situation. The £25,000 becomes chargeable to IHT. However, the IHT due on this sum is not, as you might expect, paid from the estate of Charlotte’s mum. It is payable by David and Charlotte themselves. This means the couple are not only mourning the death of Elizabeth, but they are also presented with an entirely unexpected tax bill of 40% of £25,000, being £10,000.

They have (broadly) six months from the death of Elizabeth to raise this money and pay it to HMRC. Further, they do not have the option to pay this in instalments.

So how could this situation have been avoided?

Firstly, when Elizabeth paid for the wedding, life insurance could have been taken out which pays any IHT due should Elizabeth die within 7 years. After 7 years, the £25,000 Potentially Exempt Transfer is outside the scope of IHT. If Elizabeth is in good health, this tends to be relatively cheap, as it is ‘term insurance’, i.e the insurance only lasts 7 years and is not lifelong.

Secondly, Elizabeth could have taken advice and gifted money to Charlotte and David over a period of time instead of in one lump sum. If Elizabeth had excess income (i.e income greater than expenses), and she made regular gifts to Charlotte and David, say £10,000 for three years, instead of £30,000 in one go, the amounts would not have been Potentially Exempt Transfers. It would be a ‘Normal expenditure out of income’ and therefore entirely exempt. As such, the amounts gifted would not be chargeable on her death, saving the young couple £10,000 in IHT.

It’s always worth considering the IHT implications when money is gifted, because it could land individuals with an unexpected IHT bill should the donor pass away.