What gifts can I make to save inheritance tax?
Clients often want to structure their assets so that their liability to inheritance tax on their death is minimal, meaning their beneficiaries receive more from their estates. We have listed below the common exemptions currently available.
Gifts made to individuals more than seven years before death
Also known as potentially exempt transfers (PETs). A PET is an outright gift to an individual; to a disabled person’s trust; or when an immediate post-death interest comes to an end and the continuing trust qualifies as a trust for bereaved minors all of which become exempt if the donor lives for seven years after the date of the gift.
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’.
| 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% |
Example
Mr Meaby died on 1 January 2020. He was divorced with 3 children when he died. He left 5 gifts in the 7 years before his death:
- £30,000 to his daughter brother 8 years before his death – not included in his estate because made more than 7 years before death
- £50,000 to his son 6½ years before his death – taxed at 8%
- £150,000 to his partner 4½ years before his death – taxed at 24%
- £40,000 to his grandson 6 month before his death – taxed at 40%
There is a £325,000 inheritance tax threshold,. Anything below this amount is tax free.
Mr Meaby had an estate of £500,000. The gifts will utilise the inheritance tax threshold first, in this case £240,000. Mr Meaby’s estate above the threshold is charged at the usual 40% inheritance tax rate.
Note: You can be charged a lifetime inheritance tax if you give away more than £325,000 in the 7 years before your death. It is best to seek advice before giving away large gifts.
Gifts to spouses or civil partners
Any gifts to a spouse or civil partner is exempt from inheritance tax.
Gifts not exceeding £3,000 in any one tax year
A tax year runs from 6 April in one year to 5 April the following year. This applies to one gift or a number of gifts up to that amount and may be used with other exemptions (except the small gifts exemption – see below). If the total value of gifts in one year is less than £3,000 any surplus can be carried forward to the next tax year but no further.
Gifts on consideration of marriage or civil partnership
A gift made to a person who is about to get married or to form a civil partnership. These gifts are exempt from IHT up to the following amounts:
- £5,000 for each of your children (including adopted and step-children)
- £2,500 for each grandchild
- £1,000 to anybody else
To qualify, a wedding gift must be made on or shortly before the marriage and exemption only becomes fully effective when the marriage takes place.
Gifts to UK based charities, registered housing associations and qualifying Parliamentary political parties
Gifts for national purposes e.g. national museums, universities, The National Trust and certain other bodies
of up to £250 in each tax year to any number of different recipients are exempt from inheritance tax. The exemption cannot be combined with any other exemption such as the annual exemption. Such gifts are only exempt if the total given to any one person in any tax year is not more than £250.
Gifts which are normal expenditure out of income after tax
The person making the gifts must show that after allowing for the gifts they were left with sufficient income to maintain their usual standard of living and that there was an established pattern of giving.The exemption applies where the gifts are unconditional, and the taxpayer can show that the gifts: formed part of the deceased’s usual expenditure; were made out of income and left the deceased with sufficient income to maintain their normal standard of living. It is a good idea for the person making the gifts to keep detailed records.
If you need assistance or advice then please do not hesitate to contact Esther Janalli-Brown on 01306 884432 or email ejbrown@meaby.co.uk for more information.
