As the saying goes, it’s better to give than to receive. But did you know that along with the pleasure of seeing your loved ones enjoy your gift you can also reduce inheritance tax at the same time? However, to avoid potential pitfalls, you’ll want to understand the rules first.
Know what’s defined as a gift
What counts as a gift for inheritance tax purposes? Simply put, it can be anything that’s part of your estate. Property, cars, cash, investments, jewellery – even collections of stamps, wine, coins or sports memorabilia can be liable to inheritance tax. One thing to remember is normally you can’t continue to benefit from the gifts. For example, if the gift is a car, you can’t continue to drive it. If the gift is a home, you can’t continue to live in it rent-free or inheritance tax may apply.
Begin giving early
As soon as you give a gift, an inheritance tax clock starts ticking. Usually, seven years must pass before your gift is 100% inheritance tax free. If you die before this time lapses, the person you’ve given the gift to may be liable to pay inheritance tax.
It’s one reason for giving gifts early. When you’re younger you’re more likely to live seven years from the time the gift was given. Making gifts earlier also increases your chance of getting to experience the pleasure that comes from seeing those you love enjoy what you’ve given – and to thank you for it.
This information is based on our current understanding of taxation law and practice in the UK, which may change. The amount of tax you pay and relief you receive depends on your own personal circumstances which may also
change in the future.
Avoid delays and disputes
Each of us has an annual allowance that allows gifts up to £3,000 free of inheritance tax each year. If this full amount isn’t taken one year, it carries over into the next year. This means that if you don’t give the full amount one year, you can give £6,000 the following year. However, this allowance can only be carried over for one year.
Everyone can also give as many gifts as they like up to £250 per person. These gifts are currently inheritance tax exempt – there’s no seven year clock ticking. It’s important to note that you cannot combine this small gift allowance with any other gift allowance for the same person. This means that you can’t give someone a £3,000 gift and then another £250 small gift. Donations to charities, including gifts to political parties, can also reduce inheritance tax.
There are special rules for weddings
Weddings are gift-giving occasions. But, before handing over a gift to the happy couple, consider inheritance tax. You may not be aware, but a wedding gift offers a chance to reduce inheritance tax. The amount that you can give inheritance tax free depends on your relationship to the couple, the timing and amount of your gift. Generally, the more closely you’re related to the couple, the more you can give. So if one of your children marries, you can give up to £5,000. If a grandchild or great-grandchild marries, this reduces to £2,500 or less. And if you’re giving to a relative or friend this drops to £1,000. But don’t wait until after the honeymoon to give your gift. It must be given before, not after the wedding to avoid attracting
inheritance tax.
Gifts out of excess income
A lesser known gift is that you can gift any/all excess income you receive and it immediately falls out of your estate for inheritance tax purposes. For details of what income and expenditure you should record, see below where we quote IHT 403 page 8. This is actually the probate form that would be filled in on your death so what better place to record it. Your executors can discount any years that don’t apply when sorting out your estate.
Document, document, document
It’s very important that you track the details of any gifts that you’ve made to reduce inheritance tax. The easiest way to record gifts is on the form your executors will use on your death. IHT 403 (on the gov.uk website) gives you space to record gifts on page 3, as well as gifts out of income on page 8.
Think about keeping a copy of these pages at the front of your important information folder. It’s also helpful to keep evidence of the gift, for example, you can use a bank statement to evidence a gift of money. This will make it far easier to establish if there is any inheritance tax due on your gifts.
The following will be immediately outside of your estate:
- Give up to £3,000 each year to an individual
As many gifts as you want up to £250 each year
Wedding gifts from certain relatives up to £5,000
Gifts out of excess income, unlimited!
Keep records of all gifts
For any other gifts seven years must pass before a gift is inheritance tax free.