It’s worth first defining what is treated as a gift by the Inland Revenue. HMRC defines gifts as follows:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
So here are some simple tips and rules around gifting and how they effect your inheritance tax position.
Give away your annual exemption
Every individual has a personal annual exemption. At the time of writing (November 2020) it’s £3,000.
What that means is this: You – as one individual – can give away £3,000 per year tax-free.
Now, here’s a useful thing to know:
Supposing you didn’t give away £3,000 in the previous tax-year, you can – for one year only – carry it forward and give away £6,000 in one year and it be inheritance tax free.
NOTE: you have £3,000 to give away in TOTAL. So, if you have two children you can’t give £3,000 to each of them. You have to split it between them.
BUT: If you’re a married couple then you can give £3,000 to one of your children and your spouse can give £3,000 to the other child.
There are also other exempt gifts:
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
Make regular gifts
My second simple inheritance tax planning tip is to make regular gifts out of your income. This is a great idea for grandparents.
As a grandparent you could decide to give a sum of money away and put it into your grandchildren’s trust fund or ISA or bank account. This can be £10, £20, £30 a month – whatever you can afford in fact. And, so long as it’s coming out of your income with no detrimental effect on your lifestyle then such regular gifts are disregarded for inheritance tax purposes.
This is an effective way for grandparents to give some of their money away to their grandchildren without leaving themselves short.
Make smaller intermittent gifts
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person. These will be free from inheritance tax too.
The 7 Year Rule:
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ which reduces the inheritance tax that is paid on the gift depending on when you die.
|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%|
Need further advice?
If you’d like more information on inheritance tax, inheritance tax planning and what might work for you please feel free to email me at email@example.com to book an appointment.
Or indeed if you think you need to review your existing Wills or get Lasting Powers of Attorney set up then I’m here to help. If you prefer to telephone then my number is: 07538 946 839