Inheritance Tax liability if you pass on your estate to your family

Inheritance Tax legislation is notoriously hard to navigate, but you can maximise the amount you can pass on to your family.

Inheritance Tax (IHT) is charged at 40 per cent on the value of your estate that exceeds the Inheritance Tax threshold – currently £325,000, or £750,000 when combined with a spouse or civil partner.

If you are passing down property, you may also benefit from the main residence nil-rate band. This increases your tax-free threshold by £100,000, but only if you leave your home to children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million.

So, when passing down your estate to grandchildren, it is only the part of the estate that exceeds the Inheritance Tax threshold – and main residence nil rate band if passing down your home –  that is charged.

How do you pass down property and assets to grandchildren while you’re still alive?

This is known as gifting, and if used correctly, can help you pass down more of your hard-earned estate.

Under the “annual exemption” rule, you can give away up to £3,000 worth of gifts each tax year (spanning 06 April to 05 April) without them being added to the total value of your estate. Any unused annual exemption can be carried forward, but for one year only.

You can also gift a wedding present of up to £1,000 per person (£2,500 for a grandchild or great-grandchild or £5,000 for a child) without attracting tax.

But gifts that do not qualify for relief, exceed your personal threshold, and are made within seven years of your death may attract Inheritance Tax on a sliding scale, known as the “seven-year rule”.

This is illustrated here:

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

 

For example: A gift made to a grandchild – or anyone who isn’t your spouse, civil partner or a charity – two years before your death and exceeds the Inheritance Tax threshold will attract the full 40 per cent rate of tax. But the same gift made between five and six years of your death will only attract a rate of 16 per cent, while any gifts made after seven years are not counted towards the value of your estate.

It is important to note that Inheritance Tax is only payable on death, meaning any large gifts should be given with the caveat that tax may be due in the future.

For help and advice with related tax matters, please get in touch with our tax team today.

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