Lifetime Planning and Wills expert, Jenny Greenland, considers how lifetime gifts can reduce the amount of Inheritance Tax paid by your estate.
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At the full rate, Inheritance Tax (IHT) is payable at 40% and many people question how the amount of IHT payable by their estate can be reduced. If you can afford to, one very effective mechanism is to make gifts during your lifetime.
What lifetime gifts are exempt from IHT?
The main exemptions are:
- Annual exemption: you can give away up to £3,000 a year (6th April – 5th April) tax free.
- Small gifts: in addition, you 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 (currently £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for others).
- Charities: gifts to registered UK charities are tax free.
- Community Amateur Sports Clubs: gifts to amateur sports clubs are exempt if the club satisfies the qualifying criteria.
- Political parties: gifts to political parties are exempt if at the last general election, two members of the party were elected to the House of Commons, or one member of the party was so elected and not less than 150,000 votes were given to candidates who were members of that party.
- 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?
But 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 non-exempt gifts made between three and seven years before you die, “taper relief” may apply if your estate is chargeable for IHT, which means that tax is charged at a reduced rate, as follows:
Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%
Who pays the IHT?
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.