Inheritance Tax Rules for Making Gifts

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Every tax year we can all give away £3,000 worth of gifts without them being added to the value of our estate. This is known as your annual exemption. You can carry any unused allowance over to the next tax year, but only for one year.

However, people you give gifts to will be charged inheritance tax if you give away more than £325,000 in the seven years before your death.

Gifts include anything that has a value, such as money, property or possessions, or when a loss of value is incurred when something it transferred, for example, if you sell your house to your child for less than it’s worth, the difference is classed as a gift.

Exempted Gifts

In addition to your £3,000 allowance, you can also give away:

• Gifts between a husband and wife or civil partner – you can give them as much as you like during your lifetime, as long as they live permanently in the UK
• Gifts made as part of your normal expenditure – providing the gift doesn’t reduce your standard of living and is not from capital, you can give away money from surplus income
• Wedding or civil ceremony gifts – you can give up to £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to anyone else
• Gifts for maintenance to help with another person’s living costs – this can be your spouse or civil partner, ex-spouse or ex-civil partner, or relatives dependant on you due to old age or infirmity. It also includes maintenance and education of your children (including step and adopted) in full-time study or those under the age of 18
• Gifts to UK-established charities, museums, the National Trust and political parties
• Small gifts of up to £250 per person – these can be used to cover things such as birthday or Christmas presents

Gifts That Might Be Tax Free – The 7 Year Rule

Unless they fall into the exempted gifts categories above, most gifts you give during your lifetime are classified as ‘potentially exempt transfers’ or PETs for short.

If you survive for seven years after making the gift, then there is no inheritance tax to pay. However, if you die during this time, two things happen:

1. The PET is added to your estate
If the total of your estate plus the PETs and chargeable gifts made in the previous seven years comes to less than the unused tax-free allowance, no IHT is due. However, if much of your allowance has been used on PETs and taxable gifts, this can leave little or no allowance to use against the remainder of your estate, making some amount of IHT payable.

2. The PET is reassessed
In this case the PET will be added to any other taxable gifts you may have made during the preceding seven-year period, including assets put into trust, to see whether any tax is now due on the PET itself because your allowance may have been used elsewhere. This means assets put into trust up to 14 years before your death maybe relevant.

If tax is due, the person who received the gift will be asked to pay the tax. If it’s within 3 years of your death, then 40% inheritance tax will be due, However, gifts made between 3 and 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Years between gift and death Tax due
Less than 3 40%
Between 3 and 4 32%
Between 4 and 5 24%
Between 5 and 6 15%
Between 6 and 7 8%
More than 7 0%

If you are thinking of making a gift that may exceed your annual exemption or affect your nil rate band allowance, please contact your Finura advisor.

The Financial Conduct Authority does not regulate taxation and trust advice.

Sources: https://www.which.co.uk/money/tax/inheritance-tax/guides/inheritance-tax-planning-and-tax-free-gifts
https://www.gov.uk/inheritance-tax/gifts

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