Inheritance Tax is a complicated subject and gifts are a particular source of confusion.
Whether it’s for Christmas, a wedding, or any other special occasion, small gifts are commonly exchanged throughout a person’s life.
But few people are aware that large gifts could attract tax should the benefactor die seven years before it was gifted.
Under the “annual exemption” rule, you can give away up to £3,000 worth of gifts each tax year (spanning 6 April to 5 April) without them being added to the total value of your estate.
Any unused annual exemption can be carried forward, but for one year only.
In addition, you can gift a wedding present of up to £1,000 per person (£2,500 for a grandchild or great-grandchild or £5,000 for a child) without attracting tax, as well as make tax-free traditional gifts, such as Christmas or birthday presents, out of your income, providing you can still maintain your standard of living.
You can also give as many gifts of up to £250 per person per tax year, providing you have not used another exemption on the same person.
Any gifts outside of these rules fall under the “seven-year rule”.
This means that any gifts that do not qualify for relief, exceed your personal threshold, or are made within seven years of your death attract Inheritance Tax on a sliding scale known as taper relief.
For example, if death occurs less than three years after a gift was made, Inheritance Tax is payable at a rate of 40%. At the other end of the scale, if the gift was made six years prior to death, a reduced rate of only 8% is due.
It is also worth bearing in mind that some gifts to certain trusts, companies and close companies may be considered “chargeable lifetime gifts”.
This means 20 per cent is payable immediately, with an extra 20 per cent payable if you die within seven years of making the gift.
Here at Moore Thompson, we understand the desire to help loved ones both now and in the future. We can provide expert advice on tax efficient gifting and also estate planning to ensure that your legacy is passed on in the most tax-efficient manner.
There are many ways to mitigate your IHT liability and there are exemptions and reliefs which can be used to mitigate the tax.
For help and advice with matters relating to Inheritance Tax, please get in touch with our expert team.