In this article Michelle Seddon, senior associate in our private wealth team looks at how gifting can assist with Inheritance Tax liabilities on estates.
At this festive time of year, it should be noted that there is generally no Inheritance Tax to pay on small gifts you make out of your normal income. This, of course, can include gifts you may wish to make for Christmas or birthday presents, and they are known as ‘exempted gifts’ for the purposes of Inheritance Tax.
It should also be noted that there is no Inheritance Tax to pay on gifts made between spouses or civil partners. This would mean you can gift to them as much as you like during your lifetime, as long as they live in the UK permanently, but more commonly these types of gifts may also be made around the festive season or for birthdays or special events.
So what classes as a Gift?
The definition of a gift for these purposes is:
- Anything that has monetary value for example, money, property, and personal possessions; or
- A sale of something at an undervalue to a person creating a loss in value, for example, selling your house to your son or daughter for less than it is worth. The difference between the actual value and the sale value would be considered a gift
Are all gifts exempt from Inheritance Tax?
The short answer to this is no as there are limits on the gifts you can make, even if these are classed as a Christmas or birthday gift. But, what is important is to know what you can gift and your limits.
You can individually gift up to £3,000 worth of gifts each tax year without them being included in the value of your estate if you were to pass away. A tax year is from 6th April to 5th April. This is known as your ‘annual exemption’.
You can also roll over any unused annual exemption to the next year if you had not used up your gifting allowance the year previously. However, you can only roll back a maximum of one year.
In additional to the above gifts, you can also make the following gifts in any one tax year:
- Wedding or civil ceremony gifts up to the value of £1,000 per person (or £2,500 if the recipient is a grandchild or great-grandchild, and £5,000 if the recipient is your son or daughter);
- Normal Christmas or birthday gifts out of your income (ensuring that you are still able to maintain your standard of living after making that particular gift);
- Any payments made to another person’s living costs, for example an elderly relative or a minor child under the age of 18 years old; and
- Any gifts you make to charities and / or political parties.
All these types of gifts are not limited to one per person, and can be used on the same person if you wished. For example, you could use your Christmas gifts, birthday gifts, and a £5,000 wedding gift to your child in the same tax year.
What is classed as Small gifts?
A small gift is defined as being any gift up to the value of £250. You can give as many of these £250 gifts per person as you wish during any one tax year as long as you have not applied any of the other exemption on this person already.
What is this 7 year rule I have heard about?
I mentioned previously, that not all gifts made are exempt from Inheritance Tax. If you gift anything over and above your limits (as already detailed above in this article) you would need to survive that gift by a period of 7 years for it to be disregarded in the value of your estate on death.
However, if you do not survive that gift by the 7 year period, gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ as shown in the table below:
|Years between gift and death||Tax paid|
|Less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
How do I know if my estate is liable for Inheritance Tax?
You individually have a Nil Rate Band allowance of £325,000 which is taxed at 0%. This means up to the value of £325,000 your assets would not attract Inheritance Tax.
With married couples, on the death of the first spouse, the surviving spouse can inherit the estate under a separate Spousal Exemption, and therefore there is no Inheritance Tax to pay on this transfer of assets.
If a Spousal Exemption has applied, then the first spouse has not used their Nil Rate Band allowance and this can be transferred to the surviving spouse to implement a double Nil Rate Band allowance. This double allowance currently amounts to £650,000, meaning that inheritance tax would be charged at 0% for any assets up to that value.
If your estate is liable for inheritance tax (because it is over the relevant Nil Rate Band allowances) Inheritance Tax will be payable at a rate of 40% on the estate above the relevant Nil Rate Band threshold (single or double), after deduction of liabilities.