In the article below we explore the effect that making of lifetime gifts can have on reducing an estates exposure to Inheritance Tax (IHT) liability on death. Commonly referred to as “Inheritance Tax Gifts” it is one of the simplest ways to avoid inheritance tax.
Gifts Exempt from Inheritance Tax
The following gifts can be made without either a lifetime or death IHT charge:-
- £3,000 annual exemption
- £1,000 to £5,000 wedding
- up to £250 per person
- Regular out of income
- Payments to help with living costs
- to charities
- to political parties
- to spouses or civil partners as long as both are UK resident
Married couples and civil partners can gift each other assets without any IHT or capital gains tax provided the recipient is domiciled in the UK. If the recipient is non-domiciled the amount that can be gifted tax free is restricted.
Potentially Chargeable Transfers
Lifetime gifts not covered by the above exemptions are treated as either potentially chargeable transfers (PETs) or chargeable lifetime transfers (CLT’s). By way of example, gifts to family members other than a spouse will be potentially exempt and will be completely exempt if the donor survives seven years following the gift. A lifetime gift to a discretionary trust or a company will be immediately chargeable to IHT at 20% if the gift exceeds the tax threshold and also in other circumstances.
The gifts can be included in the estate of the donor if they were made less than 7 years before the date of death.
If the person making the gift gave away more than £325,000 in gifts in the last 7 years of their life, and this includes the gift to you, you may be required to pay any IHT directly attributable to the gift. Otherwise, IHT is paid by the estate. Whether you are to pay the tax will depend upon the conditions of the Will of the donor.
IHT is payable at the following rates on PETs made between the date of the inheritance tax gifts and date of death:
- Less than 3 years – 40%
- 3 to 4 years – 32%
- 4 to 5 years – 24%
- 5 to 6 years – 16%
- 6 to 7 years – 8%
These rates may be reduced if the deceased qualified for a reduced rate of IHT.
Inheritance Tax Gifts that are not subject to Inheritance Tax
There is an annual exemption of up to £3,000 of gifts made each year. The £3,000 exemption from the previous year may also be available, if not used in that year.
The following allowances are generally in addition to this.
There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:
- £5,000 given to a child
- £2,500 given to a grandchild or great-grandchild
- £1,000 given to anyone else
The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.
Gifts up to £250
There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year. You can’t give someone another £250 if you’ve given them a gift using a different exemption, e.g. the £3,000 annual exemption. If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.
Regular gifts from the giver’s income
There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. These gifts include:
- Christmas, birthday and anniversary presents
- life insurance policy premiums
- regular payments into a savings account
Payments to help with living costs
There’s no Inheritance Tax on gifts to help with other people’s living costs if they’re made to, for example:
- an ex-husband, ex-wife or former civil partner
- a relative who’s dependent on them because of old age, illness or disability
- a child (including adopted and step-child) under 18 or in full-time education
There’s no Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.
There’s no Inheritance Tax on gifts to political parties that have either:
- 2 members elected to the House of Commons
- 1 member elected to the House of Commons and received at least 150,000 votes in a general election.
Understanding Inheritance Tax Gifts
If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090. Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.