Inheritance Tax (IHT) is something which can feel seem confusing. Knowing the ins and outs of what is and isn’t allowed to be given tax-free in gifts can be a complex but valuable process.
What counts as gifts?
IHT may have to be paid on gifts which you gave to somebody less than seven years before you died. Therefore, it is important to know what is officially counted as a gift.
Below is a list of the things classified as gifts:
Gift exemptions
Whilst the list above applies to most gifts, there are some exemptions to the rule.
Gifts given between spouses and civil partners do not need to have IHT paid on them so long as both individuals live permanently in the UK, and they are legally married or in a civil partnership.
You do not have to pay IHT on gifts made to charities or political parties either during your lifetime. In fact, if 10 per cent or more of your estate is left to charity as legacy you can further reduce the rate of IHT you pay to 36 per cent.
Annual gift allowance
Every tax year, you are entitled to give away a maximum of £3,000 worth of gifts that are tax-free. You can give all £3,000 to one person, or you can split it up between multiple people.
You are allowed to carry over any of the £3,000 entitlement not used forward one tax year.
You can also give small gifts of up to £250 per person each year tax-free to as many people as you like so long as they have not had any other allowance given to them.
Christmas and birthday presents that come from your regular income are exempt from IHT.
Weddings and civil partnerships
Gifts given for somebody getting married or having a civil partnership have different rules.
Each tax year, you are allowed to give up to:
You are allowed to combine a wedding or civil partnership gift with the £3,000 gift threshold without paying tax.
Regular payments
You can make regular payments to a person if it helps with their cost of living, such as paying rent for a child, paying into savings account for an under 18, or giving financial help to an elderly relative.
If this comes out of your normal expenditure income, then you are allowed to combine them with the £3,000 yearly allowance for the same person.
The seven year rule
As mentioned, gifts given after seven years before you die are exempt from IHT.
However, how much tax is paid depends on when the gift was given before your death, as this tax rule applies a tapered scale.
Gifts you benefit from
For a gift you will still benefit from – such as giving a holiday home to a relative but still staying there regularly – then it will count towards your overall Estate.
For advice on Inheritance Tax and organising your estate, please contact us.
