Gifts & Inheritance Tax – What You Need to Know
You may decide to make financial gifts to family members and friends during your lifetime. While this is often done with the best intentions, these gifts can have important implications for your Inheritance Tax (IHT) if not planned carefully.
Understanding the rules can help ensure that your loved ones are able to fully enjoy benefit of your gifts, without unexpected tax consequences.
Annual Tax-Free Gift Allowance
Every individual has an annual gift allowance of £3,000, which can be given away without it being added to the value of your estate for IHT purposes. If you did not use this allowance in the previous tax year, you can carry it forward for one year only. This means you can gift up to £6,000 in a single year (£3,000 from the previous year and £3,000 from the current year). However, it is important to note that the current year’s allowance must be used first.
Additional Exempt Gifts
In addition to the above, the following gifts are exempt from inheritance tax and do not eat into your £3,000:
Small gifts of up to £250 per person per tax year.
Gifts to a spouse or civil partner, regardless of the amount.
Wedding or civil partnership gifts:
£5,000 to your child.
£2,500 to your grandchild or great-grandchild.
£1,000 to any other person.
The Seven-Year Rule
Gifts that do not fall within one of the abovementioned exemptions are known as Potentially Exempt Transfers (PETs).
This means that if you survive for seven years after making the gift, it becomes fully exempt from IHT. However, if you pass away within that seven-year period, the gift may still be considered when calculating the overall value of your estate and any IHT liability.
Taper Relief
However, do not panic just yet!
If you make a non-exempt gift and pass away more than three years later (but within seven years of making the gift), taper relief may apply. Taper relief reduces the amount of IHT payable on the gift, depending on the number of years that has passed between the gift and your death; it does not reduce the value of the gift.
Taper relief applies if:
The total value of gift exceeds your nil-rate band (currently £325,000), and
The gift is not covered by any other exemption.
If used correctly, it can help reduce the tax payable on larger gifts made later in life.
Gifts With Reservation of Benefit
A common mistake when making a gift is continuing to benefit from it. For example, you gift your home to your child but continue living in it rent free. This is known as a “gift with reservation of benefit”.
If this applies:
The seven-year rule will not apply; and
The gifted asset will still be treated as part of your estate for the purposes of IHT.
To avoid this, you must therefore genuinely give up the benefit, for example, paying full market rent if you continue to live in gifted property.
Regular Gifts from Income
Another exemption, which is commonly forgotten about, is where you can make regular gifts out of surplus income. These regular gifts are immediately exempt from IHT.
To qualify for this exemption the gifts must:
Form part of a regular pattern;
From your surplus income (not capital); and
Not affect your standard of living.
This is a very useful way to pass on your wealth over time.
Need Advice?
Making gifts during your lifetime can be an effective way to reduce the value of your estate for IHT purposes. However, the rules relating to gifting can be complex; seeking professional advice can help ensure you are making the most of the available allowances while avoiding unintended consequences.
At WT Solicitors, we can guide you through various effective estate planning strategies tailored to your personal circumstances.
Get in touch today to arrange a meeting with Suja Sundaresan-Kotecha, our Head of Estate Planning, and ensure your plans are structured in the most tax-efficient way possible.