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:
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).
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.
A real-world example of this exemption would be a grandparent using excess pension income to pay for a grandchild’s school fees.
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.
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:
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.