If you have gifted more than £325,000 in the 7 years before your death, those individuals receiving gifts could be liable to inheritance tax (IHT). However, the good news is there are certain exempt gifts. Firstly, we must establish what constitutes a gift.
What is a gift?
• Anything that has a value. For example a property, money or objects.
• If there is a loss of value, to the donor, when something is sold or transferred, for example you sell your property to your child for less than market value. The difference between for amount received and the market value would be considered a gift.
However, there are exempt gifts that are not liable to IHT. Everybody has a £3,000 IHT ‘annual exemption’. You can make £3,000 worth of gifts each tax year (6 April to 5 April), tax free. You can also carry any unused annual exemption forward for one year. For example, if you did not make a gift in the current tax year, in 2021/22 you can make up to £6,000 worth of gifts IHT free.
Each tax year you can also gift the following IHT free:
• Wedding or civil ceremony gifts – £5,000 per child, £2,500 for a grandchild or great-grandchild and £1,000 to anyone else. The gift has to be made before the wedding and the wedding has to happen.
• Family maintenance expenses – you can cover certain costs of an elderly dependent, a child under the age of 18 or in full-time education, or an ex-spouse to help with their living costs.
• Small gift exemption – gifts of up to £250 can be made to unlimited individuals, if you have not used another allowance on that person.
• Gifts to charities or political parties – any gifts to UK charities, including community amateur sports clubs (CASCs) in your lifetime or in your Will are exempt from IHT. The same goes for qualifying political parties.
• Regular gifts from surplus income – regular financial gifts from income after-tax will qualify, if you have enough income to maintain your normal lifestyle after making the gift. Income includes employment, pensions, interest, dividends, and rental income. The gift must form part of your ‘normal expenditure’ and are paid out on a regular basis. It is important that a record is kept of these gifts.
In conclusion, there are many ways you can reduce your estate, that are free from inheritance tax. Please make us aware of these gifts, so we can keep a record. This information could be simply be provided with your tax return information annually. If you would like further information on how to reduce your inheritance tax liability, please get in contact.