Gifts and exemptions from Inheritance Tax

Making a gift to your family and friends while you’re alive can be a good way to reduce the value of your estate for Inheritance Tax purposes and benefit your loved ones immediately. But estate and tax planning is a complex area. So getting professional advice can help you avoid several big pitfalls when making a gift.

• How much can I give to my spouse or civil partner tax-free?
• How much can I give to my children and family tax-free?
• Gifting to a charity in your will
• How much is the annual ‘gift allowance’?
• What else can I give tax-free?
• What is a ‘potentially exempt transfer’?
• Taper Relief
• Are there any reliefs from Inheritance Tax?
• Where to get advice on estate and tax planning

How much can I give to my spouse or civil partner tax-free?

Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die.

In other words, the surviving spouse can inherit the entire estate without having to pay Inheritance Tax (IHT).

They can also pass on their unused tax-free allowance to their surviving spouse or civil partner.

For example, if a husband dies and leaves all his estate to his wife, she can take his allowance of £325,000 and add it to her own tax-free allowance. However, if the husband’s estate is £300,000 and he left it all to his brother, the wife would only be entitled to the remaining £25,000.

Gifts to an unmarried partner might incur Inheritance Tax.

How much can I give to my children and family tax-free?

What and how much you wish to give your children or other members of your family is completely up to you.

But to ensure that it’s tax-free, it’s important to plan when to make that gift.

Simply put, so long as you live more than seven years from when you make this gift, your children or family won’t have to pay Inheritance Tax (IHT) on your gift when you die.

However, any income made from this gift could have tax implications for the beneficiary, for example, Capital Gains Tax.

But if you unfortunately don’t live more than seven years after you’ve made the gift, they might have to pay Inheritance Tax.

When the gift is first made it is called a Potentially Exempt Transfer, as, assuming you live for a further seven years, there will not be any IHT due on it. If you die within seven years, it’s called a Chargeable Transfer.

This means if you’re thinking about giving away money or assets to your family and friends to reduce Inheritance Tax, it’s very important you make a record of:

• what you gave
• who you gave it to
• when you gave it
• how much it’s worth.

This will make it easier for the executor of your estate to work out during probate what parts of your estate are liable for tax.

Gifting to a charity in your will

To encourage more people to leave money to charity, any cash or physical asset you leave to a qualifying charitable body, either during your lifetime or in your will, would be exempt from Inheritance Tax (IHT).

This can also reduce the rate at which IHT is due from the current rate of 40% down to 36%. This reduced rate would only apply if the value gifted to charity amounted to at least 10% of the “net estate” at the date of death. Potentially saving thousands of pounds.

Generally, the net estate is defined as the value left over after deducting any exemptions (including your available nil rate resident band) and any other available reliefs.

This can be quite a complex area and you may want to seek professional advice to be sure any gift you make will qualify.

How much is the annual ‘gift allowance’?

While you’re alive, you have a £3,000 ‘gift allowance’ a year. This is known as your annual exemption.

This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax (IHT) purposes.

Any part of the annual exemption which is not used in the tax year can be carried forward to the following tax year. It can only be used in the following tax year and can’t be carried over any further.

Certain gifts don’t count towards this annual exemption. As such, no Inheritance Tax is due on them.

Gifts worth more than the £3000 allowance in any tax year might be subject to Inheritance Tax.

What else can I give tax-free?

Gifts that are worth less than £250

You can give as many gifts of up to £250 to as many individuals as you want. Although not to anyone who has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to Inheritance Tax.

Wedding gifts

In this case, if the gift is to be effective for inheritance tax purposes, it has to be made before, not after, the wedding and the wedding has to happen,
and it has to be:

• given to a child and is worth £5,000 or less,

• given to a grandchild or great-grandchild and is worth £2,500 or less, or

• given to another relative or friend and is worth £1,000 or less.

Gifts to help with living costs

Gifts to help pay the living costs of an ex-spouse, an elderly dependent or a child under 18 or in full-time education might be exempt.

Gifts from your surplus income

If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income. For example, regularly paying into your child’s savings account, or paying a life insurance premium for your spouse or civil partner.

To make use of this exemption, it’s very important that you keep very good records of these gifts.

Otherwise, Inheritance Tax might be due on these gifts when you die.

The rules for this exemption are complex - for example, these gifts must be regular, so you need to be committed to keeping up with making these gifts.

It’s best to speak to a legal or estate tax adviser first if you want to use this exemption.

Grandparents can also use it to pay for things like their grandchildren’s school fees.

• Charitable gifts: If you give a gift to a charity, museum, university or community amateur sports club, this is exempt from tax.

• Political party gifts: you can give an Inheritance Tax-free gift to a political party under certain conditions.

What is a ‘potentially exempt transfer’?

A Potentially Exempt Transfer (PET) enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.

If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT. If the combined value is more than the IHT threshold, IHT may be due.

Any lifetime transfer that is “Potentially Exempt” must meet certain conditions subject to certain exceptions. The transfer is a gift made by an individual to another individual or to a specified trust. This means, for example, the gift cannot be made from or to a corporation or company.

For example, if a gift of £400,000 is given:

1. The gift will initially use up the available NRB of £325,000 (oldest gifts are attributed first).

2. The remaining £75,000 on death is then subject to IHT (in addition to IHT on the estate).

3. If the remaining £75,000 was given over three years before the death, taper relief may apply.

4. For example, if the whole gift was made between three and four years before the death, the tax charge on the £75,000 would be 32%.

5. So IHT due on the PET would be £24,000.

Gifts where you still have an interest in it, no matter when you’ve given it, don’t qualify as a PET.

For example, if you continue to live rent free in the house you gave your child more than 10 years ago, the house would still be considered part of your estate and therefore subject to IHT. This is known as a gift with a reservation of benefit.

Taper Relief

If there’s Inheritance Tax (IHT) to pay, it’s charged at 40% on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

The table above shows the reduction in IHT tax that would otherwise be payable on the transfer.

Taper relief does not reduce the value of the gift transferred; it only reduces the tax payable.

Are there any reliefs from Inheritance Tax?

Certain assets receive relief from Inheritance Tax (IHT). This means there has been a transfer of something of value, but tax is not due on the full value. You normally need to claim for this and it must meet a number of conditions.

• Business
  Depending on how you own the business and what type of business it is, you can get either 50% or 100% tax relief on some of an estate’s business assets. These could have been passed on while the owner was alive or as part of the will, but must have been owned for at least two years before they died.

• Agricultural property You can pass on a farm free from Inheritance Tax, as long as it meets certain conditions. But certain farm assets aren’t exempt from tax, such as farm machinery.

• Woodland property If you leave a woodland property, the land itself is not subject to Inheritance Tax. But the trees on the property are subject to the tax if it’s sold or given away as timber.
  The executor of your estate will have to include the value of the woodland when applying for probate even though it’s not considered for Inheritance Tax.

• Heritage assets If you own a building, land, or objects of national scientific, historic or artistic importance, you could claim relief from Inheritance Tax. Generally speaking, this only applies to stately home, land of outstanding natural beauty, or famous works of art.
  There are however certain conditions that must be met in order to get this relief.

• Some gifts depending on the value and when it was given.

Money, assets or property you put into a trust isn’t always exempt from Inheritance Tax.

It depends on the type of trust you choose to set up to hold the asset.

Learn more in Using a trust to cut your Inheritance Tax.

Where to get advice on estate and tax planning

When you make your will, it’s always a good idea to plan your estate and what should happen to it when you die.

Making gifts and transfers in your lifetime is one way of planning your estate. It’s a good way of cutting your Inheritance Tax.

But the law in this area is quite complex.

The same also applies to putting your assets into a trust for your family to inherit when you die.

It’s best to get advice from an expert in estate planning, such as a solicitor or an independent financial adviser.

To search for an estate and tax planning adviser in your area, use:

• Money Advice Service Retirement Adviser Directory

Select ‘Inheritance tax planning’ to refine your search results for experts in Inheritance Tax.

• Chartered Institute of Taxation

Read Choosing a financial adviser for more help on how pick to a suitable adviser.

This article is provided by the Money Advice Service.