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Are gifts liable for Inheritance Tax?

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Inheritance Tax (IHT) is paid on the assets that someone leaves behind when they die, i.e. property, money, businesses etc. Inheritance Tax is usually paid on estates worth more than £325,000, although the threshold can be higher under certain circumstances, such as if you leave your home to your children. This IHT threshold amount is referred to as the ‘nil rate band’.

Some people seek to reduce the value of their estate, and therefore their Inheritance Tax bill, by giving away ‘gifts’ to friends and family while they are alive. Gift giving is a complex area, so it is important to understand what constitutes a ‘gift’ and how this affects your estate’s liability for Inheritance Tax. It is also essential to seek advice from a legal professional before you give away any gifts.

What counts as a gift from your estate?

A gift is classified as any of the following:

  • Assets of value, e.g. money, property, possessions
  • An asset that is reduced in value when transferred e.g. if a house is sold to a family member for less than it is worth.

There are some exceptions to those rules. For example, you have an annual ‘gift allowance’ of £3,000, known as an annual exemption, that is not added to the value of your estate. You are allowed to carry over any unused allowance into the following tax year, but for one year only. This means that you cannot build up your allowance over several years and then give away one big gift.

You can also give away these exempted gifts:

  • Christmas and birthday gifts
  • Wedding/civil ceremony gifts up to £1,000 per person
  • Wedding/civil ceremony gifts up to £5,000 per person where the recipient is your child or £2,500 where the recipient is your grandchild
  • Payments that go towards another person’s living costs e.g. a child under the age of 18
  • Gifts to political parties or charities

In addition to this, you may give as many gifts as you want up to the value of £250 per person, so long as you have not used another exemption on the same person e.g. the £3,000 annual gift allowance.

How much Inheritance Tax do you have to pay on gifts?

Any gifts you give away are known as a ‘potentially exempt gift’ or PET until 7 years have passed when they are no longer counted towards the value of your estate and are exempt from Inheritance Tax.

Where Inheritance Tax is due on a gift, it is set at 40% if it is given in the 3 years leading up to your death. Anytime between 3 and 7 years and the tax is on a sliding scale know as ‘taper relief’.

The tax on gifts is charged as follows:

  • Less than 3 years before death – 40%
  • 3-4 years before death – 32%
  • 4-5 years before death – 24%
  • 5-6 years before death – 16%
  • 6-7 years before death – 8%
  • 7 or more years before death – 0%

Your gift will be exempt from the PET if you still have an interest in it, regardless of when it was given away. For example, if you have gifted your home to your child more than 7 years ago, but you still live at that property without paying rent. This is known as “reserving a benefit” and the gift will still be considered part of your estate and therefore liable for Inheritance Tax.

Inheritance tax is only due on gifts where the total value of the estate (including all gifts) exceeds the IHT threshold.

Are there exemptions to Inheritance Tax?

If you are married or in a civil partnership, you may pass on your whole estate without having to pay Inheritance Tax. Also, if you or your spouse dies, the surviving spouse may inherit the other’s unused tax-free allowance and add it to their own. This means you can have a combined tax-free threshold of £650,000 (or more if you leave your home to your children).

If you leave your home to your children (including adopted, foster or stepchildren), your Nil Rate Band increases to £450,000, meaning there is no Inheritance Tax due on the first £450,000 of your estate. A married couple or civil partners leaving their home to their children can therefore have a combined Nil Rate Band of up to £900,000.

Other assets such as businesses, woodland or agricultural property and heritage assets may be exempt from Inheritance Tax or eligible for a tax relief.

Although there are some gifts that are exempt from the Inheritance Tax, it is still important to keep track of all gifts you have given away while alive, including names, dates and values. This will make it easier for the executor of your estate to calculate how much tax is owed.

If you need help with estate planning and gift giving our Wills & Probate team will guide you through the process and work hard to ensure that your wishes are carried out. Call us today on 01476 372036 or via our contact page.

All tax rates are correct at 03.12.2018.