One way to reduce Inheritance Tax on the estate you leave behind is to make gifts to your friends and family. If this is something that might work for you, there are a number of limits and rules to be aware of. It is important to get professional advice to help you avoid any potential pitfalls when making a gift during your lifetime.
How much can I give to my spouse or civil partner tax-free?
There is no Inheritance Tax on money or assets gifted from one spouse to another during your lifetime or under a will.
One advantage of passing your whole estate to your partner when you die is that they also gain your unused tax-free allowance.
The normal Inheritance Tax threshold applies on an estate worth more than £325,000, but if you have passed everything to your widow or widower, the tax allowance would increase to £650,000.
If you are not married or in a civil partnership or the recipient spouse’s permanent home is not in the UK then Inheritance Tax may apply when you leave the estate to a partner.
How much is the annual gift allowance?
You may choose to share some of your assets with friends and family years before your death. All UK residents are entitled to a £3,000 ‘gift allowance’ every year.
This gives you the opportunity to gift assets or cash worth up to £3,000 in a tax year without the recipient having to pay inheritance tax.
If you don’t use this annual exemption in any given year, you can carry it forward to the following tax year – but no further.
Gifting to a charity in your will
Leaving money or assets to a registered UK charity is exempt from Inheritance Tax. This exemption is available for both lifetime gifts and assets left to a charity in a will.
A charitable donation can also reduce the rate of Inheritance Tax on the rest of your estate, from 40% down to 36%. This reduced rate only applies if you donate at least 10% of the net worth of your estate. See the Government website for more detail on how this works.
What else can I give tax-free?
There are a few gifts that you can make without worrying about Inheritance Tax implications:
Gifts under £250 – There is no limit on gifts worth up to £250. This exemption is available for lifetime gifts only. You can make as many as you like in a year, but not to someone who has already received a gift within your £3,000 annual exemption and the limit is £250 per individual recipient. This exemption is typically used for Christmas or birthday gifts.
Wedding gifts – These are exempt from inheritance tax provided that they are made before the wedding, and the wedding is not cancelled for any reason. The exemption is limited to £5,000 if the gift is made by a parent, £2,500 if the gift is from a grandparent or by one of the couple getting married to the other and £1,000 if the gift is made by anyone else.
Helping with living costs – In some cases, gifts to help with living costs are exempt, such as to support an elderly dependent, a child under 18, an ex-spouse or a child in full-time education.
Gifts from surplus income – If you have more income than you need, then you may be able to make gifts from your surplus income. To qualify for this exemption the gift must be from income and not capital, the gift must form part of a regular pattern and it must not impact on your usual standard of living.
Business Relief (BR) and Agricultural Relief (AR) – Under certain conditions, gifts of certain business interests and agricultural property may qualify for Inheritance Tax relief. The relief is available on lifetime gifts or on death at the rate of either 100% or 50% subject to qualifying criteria.
How much can I give to my children and family tax-free?
Any other gifts that fall outside of the above exemptions, may be subject to Inheritance Tax.
Any gift that you make that isn’t exempt from Inheritance Tax, will continue to form part of your estate for Inheritance Tax purposes for the following seven years after making the gift. For this reason, a gift of this kind is called a ‘Potentially Exempt Transfer (PET)’.
If you give away more than £325,000 in the seven years before your death, then the person who received the gift may be charged Inheritance Tax. If you give away less than £325,000 in the seven years before your death, whilst the recipient won’t have to pay Inheritance Tax on the gift, the amount will be deducted from the tax free allowance available on death (the Nil Rate Band).
It is important to note that gifting an asset in your lifetime may trigger other tax liabilities such as Income Tax, Capital Gains Tax or Stamp Duty Land Tax and if you continue to benefit from the gifted asset then Inheritance Tax may still apply.
What is Taper Relief?
Taper Relief relates to Inheritance Tax that is payable on a gift – when the donor (the person making the gift) has died less than seven years after gifting money or assets.
If the gift donor has died within three years of making the gift, Inheritance Tax is payable at 40%.
If the death was between three and seven years after the gift, the tax reduces on a sliding scale, starting at 32% and decreasing by 8% each year. See Taper Relief figures on the Government website.
Where to get advice on gifts and inheritance tax
Making gifts in your lifetime is just one element of estate planning. There are many approaches to explore and consider in planning your will and legacy. The laws and rules in this area are complex, and everyone’s situation is slightly different.
It’s best to get advice from estate planning experts to make sure that you have considered all the options. Contact us today for an initial chat about how we can help.
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