Making use of the various gifting allowances and exemptions that are available can be a powerful way of reducing the value of your estate for Inheritance Tax (IHT) purposes, whilst potentially providing a meaningful benefit to your loved ones as and when they need it.
Generally speaking, IHT may have to be paid after your death on any gifts made in the 7 years preceding your death. A gift can be anything you give that has value, such as money, possessions, and property. It can also be something that has decreased in value. For example, if you sell your house for less than its actual value to your child, the difference could be classed as a gift.
In this blog post, we have provided an overview of five scenarios where gifts can be made free from IHT:
- Using your annual exemption – You can gift up to £3,000 each tax year without the gift being added to the value of your estate. This is known as your ‘annual exemption’.
This can be made to one person or split between several people.
If you don’t use your full allowance in one tax year, this can be rolled over to the following tax year (but only for one tax year).
- Using the small gifts exemption – You can make gifts of up to £250 per person each tax year without these being added to your estate.
The exemption is not available if a small gift is made to the same person that you have already gifted your £3,000 annual allowance to in the same tax year.
- Making gifts out of regular excess income – There is no limit on any gifts made from excess income, which are immediately exempt from IHT, provided that:
- Making the gift does not impact on your standard of living.
- The gift forms part of your regular expenditure.
- The gift is made from income (as opposed to capital) – In practice, gifts (even if made out of income) will not qualify for the exemption if you have to resort to using capital to meet your normal living expenses as a result of making the gift.
A real-world example of this exemption would be a grandparent using excess pension income to pay for a grandchild’s school fees.
- Wedding gifts – you can give a tax-free gift to someone who is getting married or starting a civil partnership, up to a value dependent on your relationship with the person getting married. You can gift up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
For the gift to be effective for IHT purposes, it must be made before the wedding (and the wedding has to happen!).
You can combine a wedding gift allowance with any other allowance, except for the small gift allowance. For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
- Gifts to your spouse or a charity – There is no limit on any gifts made to your spouse or a charity, with these being immediately exempt from IHT.
Any gifts made in excess of the available allowances and exemptions will remain in your estate (and therefore are potentially liable for IHT) for 7 years from the date of the gift.
It is therefore very important that you keep a record of any gifts you make, including details of:
- The amount gifted
- The date the gift was made
- Who the gift was made to
This will make it easier to establish if there is any inheritance tax due on your gifts when you die.
If you would like further information on anything covered in this blog post, please get in touch.
The information featured in this article is for your general information and use only and is not intended to address your particular requirements. The article is based upon our understanding of HMRC legislation and practice. Tax rates and allowances relate to 2022/2023 tax year and are correct at the time of publication. Allowances, reliefs and other tax legislation is subject to change and depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Inheritance Tax Advice.