Labour’s new policy on inheritance tax means that more estates could pay inheritance tax (IHT) in future. Whilst there are plenty of legitimate ways to reduce an IHT liability, there’s one which we often forget despite it being very simple. That’s giving money to your loved ones.
Although gifting is simple, and might be something you already do without thinking, there are a few rules you should be aware of:
Annual Exemption: Each tax year, you can gift up to a certain amount without incurring any IHT. As of my last update, this amount was £3,000 per tax year. Unused annual exemptions can be carried forward for one year only.
Small Gifts: You can make small gifts of up to £250 to as many individuals as you like, and these gifts are exempt from IHT.
Wedding and Civil Partnership Gifts: You can give cash or gifts worth up to a certain amount without paying any IHT. The current limits are £5,000 for wedding gifts by a parent, £2,500 for wedding gifts by a grandparent or great-grandparent, and £1,000 for wedding gifts by any other person. For civil partnerships, the limits are the same as for weddings.
Gifts Out of Normal Expenditure: You can make gifts out of your normal income without incurring IHT, as long as you still have enough income left to maintain your usual lifestyle. If the gift would have a detrimental impact on your lifestyle it might not qualify as a gift.
Seven-Year Rule: If you make a gift and survive for at least seven years afterwards, it will not be counted towards your estate for IHT purposes. However, if you die within seven years of making the gift, it might still be subject to IHT.
Potentially Exempt Transfers (PETs): Gifts made during your lifetime that exceed the annual exemption and other allowances are known as Potentially Exempt Transfers. If you survive for seven years after making these gifts, they become exempt from IHT. However, if you die within the seven-year period, they may be subject to IHT on a sliding scale known as taper relief.
Exempt Beneficiaries: Some gifts to certain beneficiaries are exempt from IHT regardless of when they were made. For example, gifts to a spouse or civil partner who has a permanent UK domicile are generally exempt.
Gifting is something we all do from time to time, and it’s often done without thinking about the tax consequences. However it can also be a key part of an estate planning strategy with the right safeguards in place. We are always happy to advise where required.
