Recent figures from the Office for National Statistics show that Brits paid £2.4 billion in Inheritance Tax (IHT) in the first six months of this tax year.
While the tax receipts were lower than the same period in 2018, deceased estates are still paying significant sums in what has been called the ‘voluntary’ tax.
One way you can reduce the amount of potential IHT liability is to make gifts during your lifetime. Here are seven types of gift that can be made.
- Gifts to a spouse or civil partner
When they die, a married person or civil partner can pass their estate to their spouse without having to pay any IHT. In addition, they can also pass on their unused tax-free allowance.
For example, if a husband died and left his entire estate to his wife, she can take this allowance of £325,000 and add it to her own tax-free allowance.
However, if the husband’s estate is £250,000 and he left it all to his brother, the wife would only be entitled to the remaining £75,000.
In addition, a married person or civil partner can also leave any unused Residence Nil Rate Band (RNRB) to their spouse on death. The RNRB is an additional threshold available where a deceased person leaves their residence to their direct descendants. The current RNRB is £150,000.
Remember that unmarried couples are treated differently and so there may be tax to pay if a person leaves their estate to an unmarried partner.
- Annual gift allowance
Every individual has an annual gift allowance. This means that gifts of up to £3,000 can be made each tax year with no liability to IHT.
Any unused part can be carried forward one year to the next year, meaning that a total of £6,000 could be gifted if the previous year’s allowance had not been used.
This annual exemption means a couple can normally give away £6,000 a year, rising to £12,000 if no substantial gifts were made in the previous tax year.
- Small gifts
Gifts up to the value of £250 are exempt from Inheritance Tax.
This means an individual can give as many gifts up to £250 as they wish, as long as this is not to someone who has already received a gift of the entire £3,000 annual exemption (see above).
- Gifts to charity
An individual pays no IHT on any donations made to:
- UK charities
- The National Trust
- National museums
- Political parties (generally those represented in parliament with at least two MPs)
- Community amateur sports clubs
There are also benefits to leaving money to charity in a will. If cash or assets are left to charity in a will these will also be free of IHT. Additionally, if at least 10% of the ‘net estate’ is gifted to charity on death, the rate at which IHT is payable reduces from 40% to 36%.
- Gifts from income
If an individual has enough income to maintain their usual standard of living, they can make gifts from any ‘surplus’ income. Examples of such gifts could be:
- Paying regularly into a child’s savings account
- Paying a life insurance premium for a spouse or civil partner
- Grandparents paying for a grandchild’s school fees
To use this exemption, it is important to keep good records as the rules are complex. For example, the gifts must be regular and so an individual must be committed to maintaining the gifts.
- Wedding gifts
Gifts given on the occasion of a wedding are free of IHT if they are made before the wedding and the wedding takes place.
The limit on gifts that are exempt from IHT are:
- £5,000 for a child
- £2,500 for a grandchild or great-grandchild
- £1,000 for another relative or friend
- Potentially Exempt Transfers
Any gifts that an individual gives in their lifetime is potentially free of tax if they were to live for seven years after making the gift. This is called a ‘potentially exempt transfer’ (PET).
If someone lives for seven years after making a gift, no IHT is payable on it when they die. If they die within seven years, then it is a ‘chargeable transfer’ and tax may be due.
Any gift made in a person’s lifetime designed to reduce IHT should be documented and records kept. This makes it easier for the executor of an estate to work out what tax is due on death.
Get in touch
Want to know more about how you can reduce your potential Inheritance Tax liability?
Email: firstname.lastname@example.org or call 0121 313 1370.