BLB’s Head of Wills and Probate, Sarah Loveless, explains how gifts we make in our lifetime can affect the amount of Inheritance Tax we pay when we die. Should you have any questions, or for further information, Sarah can be contacted on 01225 755656, or by email at firstname.lastname@example.org.
Most of us make numerous gifts each year without giving a second thought to whether our generosity has triggered a liability for Inheritance Tax (IHT). Whether it does so will depend on who the recipient is and the amount of the gift. But lifetime gifting can also be a useful mechanism to reduce our liability for IHT, which at the full rate is payable at 40%.
Does every gift attract IHT?
No. In broad terms, the main exemptions are:
- Annual exemption: we can give away up to £3,000 a year (6th April – 5th April) tax free.
- Small gifts: in addition, we can make an unlimited number of small gifts of up to £250 per person, as long as another exemption has not been used on the same person.
- Spouse or partner: no tax is payable on gifts to your UK-based spouse or civil partner.
- Wedding or civil ceremony gifts: the amount you can give tax free depends on your relationship with the recipient – child, grandchild, or other.
- Charities and political parties: gifts to registered UK charities and political parties do not attract tax.
- Living costs: you can make payments from your surplus income to help with another person’s living costs, such as an elderly relative or child under 18. You must be able to prove that these payments are not coming from your savings.
How far back can HMRC look?
Whatever the nature or size of the gift, if it was made more than seven years before you die, it is exempt from IHT. For gifts made between three and seven years before you die, “taper relief” may apply if your estate is chargeable for IHT. This means that tax is charged at a reduced rate.
Where tax is payable, if the amount of the gift is above the IHT threshold – currently £325,000 – then the recipient, or a representative of your estate, will have to pay tax on the total value of the gift. If the gift is below the IHT threshold, then the value of the gift is added to the value of your estate, and tax is paid on the amount over the threshold.