Making a gift whilst you’re alive can be a great way to reduce your estate for inheritance tax purposes, and benefit your loved ones. But estate planning can be a complex area, and it is important to get legal advice to help you to avoid the pitfalls of making gifts of your assets.
As a starting point, every individual has a “nil rate band”, currently £325,000, which is chargeable to inheritance tax at 0%. It therefore applies to reduce inheritance tax payable on an estate upon death. Certain gifts are exempt from inheritance tax and therefore do not reduce your available nil rate band.
The most common are as follows:-
Gifts to your spouse or civil partner – inheritance tax is not payable on any gift made between spouses or civil partners during lifetime or on death. If the entire of your estate if left to your spouse or civil partner on your death, the survivor will also inherit any of your unused nil rate band;
Outright gifts to a charity are exempt from inheritance tax, and if a certain amount of your estate is left to a charity on death it can reduce the inheritance tax charge from 40% to 36%;
An annual exemption of £3,000 – lifetime gifts up to this amount are free of inheritance tax, and any unused portion of the annual exemption can be carried forward for one tax year;
Lifetime gifts of up to £250 to any one person;
Wedding and civil partnership gifts are exempt up to certain limits – each parent can give £5,000, each grandparent can give £2,500 and any other person can give £1,000;
Gifts from your surplus income (if you have enough income to maintain your usual standard of living). This could include regularly paying into a child’s savings account or paying your grandchildren’s school fees. A regular pattern of giving is required for this exemption to apply.
Any other transfers made during lifetime are “potentially exempt” from inheritance tax if the donor survives seven years from making the gift. If the donor fails to survive seven years, the gift will become fully chargeable and will use up all or part of the donor’s nil rate band (although the amount of inheritance tax will start to reduce after three years from the date of the gift). For example, if an individual gives their friend £50,000 and dies six years later, that gift will be taken into account and will reduce their nil rate band accordingly; if they survive eight years, it will not.
To make use of these exemptions, it is important to keep good records so that it is clear upon your death whether certain gifts should or should not be taken into account when calculating how much of your nil rate band is available.
If you have any questions relating to inheritance tax, please contact Laura Sentkovsky on 0207 703 5034 or at firstname.lastname@example.org.
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