Inheritance Tax and Gifts to Reduce it

Inheritance Tax and Gifts.

Generally, small gifts you may make out of your income, such as Christmas or birthday presents will not be pulled back into the Inheritance Tax calculation if you die within 7 years – as long as you do things correctly. These ‘exempted gifts’ are effectively tax-free PROVIDED they do not reduce your standard of living – something your executors may have to prove after you have gone, so be careful.

We know specialists in IHT Planning and IHT estates who can often save substantial amounts with their expertise. So a modest initial fee should point you in the right direction, though we can help both the executors and the beneficiaries improve things.

There is no Inheritance Tax on gifts between spouses or civil partners, PROVIDED they both live in the UK permanently.

Most other gifts WILL be included in the value of your estate (see below) if you die within 7 years.

Folk you give to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.

What counts as a gift as far as Inheritance Tax?

  • anything which has a value, such as money, property, possessions.
  • Any loss in value to your estate when you make a gift. A couple of examples:
    • You have a valuable pair of vases, worth £100,000 together or £25,000 each.   That would be treated as a gift of £75,000.
    • If you sell your house to your child for £150,000 and it is worth £350,000 then that would be a potential gift of £200,000.

 Gifts Exempt from Inheritance Tax.

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. If the gift has not been completely handed over by 5th April, then it will be treated as given in the next year – so it is no good sending a cheque a couple of days before the year-end, as it has to be cleared through the beneficiaries bank account before it complete for IHT purposes.

This is known as your ‘annual exemption’. Any unused proportion can be carried forward to the following tax year – but only for one year.

Each tax year, you can also use these specific exemptions:

  • wedding / civil partnership gifts up to £1,000 per person (that is from each of a couple). For a grandchild or great-grandchild the allowance is £2,500  and for your own children £5,000.
  • Normal gifts out of your income can be very tricky, but they can also be very large in certain circumstances. Typically Christmas or birthday presents.  The big issue can be that the gift must not reduce your standard of living. And your executors may have to prove that several years in the future, if the Taxman decides to check it out – and you won’t be there to provide the evidence.   Another reason to use our IHT Review service!
  • Reasonable payments to assist another person with their living costs, such as an elderly relative or a child under 18.
  • Gifts to many UK charities and many UK political parties. There are ways of gifting to some overseas charities and still gaining IHT exemption.

You can use more than one of these exemptions to help an individual e.g. you could give your grandchild gifts for his birthday and wedding in the same tax year.

Small gifts up to £250.

You can give as many gifts of up to £250 per person as you want during the tax year PROVIDED you don’t give anything to a person you have used one of the other exemptions too in the same tax year.

The 7 year rule on IHT. The effect of Inheritance Tax on Gifts.

Where there is IHT to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Gifts are not counted towards the value of your estate after 7 years.

Years between gift and death                       Tax to pay
less than 3                                                               40%
3 to 4                                                                        32%
4 to 5                                                                        24%
5 to 6                                                                        16%
6 to 7                                                                          8%
7 or more                                                                  0%