Making gifts during your lifetime can be an easy and efficient way to reduce your Inheritance Tax (IHT) exposure. There are many ways to pass on assets without necessarily having to pay IHT and these range from making small gifts from your income to more substantial gifts. Some examples include:
Each tax year, you may gift up to £3,000 free of IHT. This sum may be given as a single gift or as several gifts adding up to that amount. If you have not already used all your annual exemption for the previous year, you can use your unused allowance this year.
In addition to your annual exemption, you can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give one person more than £250 and claim that the first £250 is a small gift (the gift would become part of your £3,000 annual exemption). You also can’t use your small gifts allowance together with any other exemption when giving to the same person.
Wedding gifts/civil partnership ceremony gifts
Wedding or civil partnership ceremony gifts are exempt from IHT, subject to certain limits. Parents can give £5,000 each, grandparents and great grandparents can give £2,500 each and anyone else can give £1,000 each. You have to make the gift – or promise to make it – on or shortly before the date of the wedding or civil partnership ceremony.
Gifts out of income
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from IHT. These gifts will only qualify if you have enough income left over after making them to maintain your normal lifestyle.
Exempt maintenance payments
You make these to your husband, wife or civil partner, your ex-spouse or former civil partner, relatives who are dependent on you because of old age or infirmity, as well as to your children, including adopted children and step-children, who are under 18 or in full-time education
Potentially exempt transfers
If you survive for seven years after making a gift to someone the gift is generally exempt from IHT. If you die within seven years, and the total value of gifts you made is less than the IHT Nil Rate Band (NRB), which is currently set at £325,000 per person, then the value of those gifts is added to your estate for IHT purposes. Any IHT due on the value of your estate at the time of your death is paid out of the estate.
If you die within seven years of making a gift and it is valued at more than the IHT NRB, IHT will need to be paid on the value of the gift, either by the person receiving the gift or by the personal representatives of the deceased person’s estate. If you die between three and seven years after making a gift, any IHT on the gift is reduced on a sliding scale. This is known as ‘taper relief.’
Spouse or civil partner exemption
The transfer of assets between spouses or civil partners are exempt from IHT regardless of the value of your estate or the assets transferred.
Any gifts you make to a ‘qualifying’ charity – during your lifetime or in your will – will be exempt from IHT. A donation to charity in your will may also reduce the rate of IHT from the standard rate of 40% to the lower rate of 36%.
These allowances and exemptions are often overlooked but remain useful IHT planning tools.