Nobody wants to pay more taxes than they have to or saddle their family with a hefty tax bill. Fortunately, there is a way to reduce the value of your estate for inheritance tax purposes by giving away assets before your death, some of which attract exemptions and reliefs. However, there are numerous regulations and limits to how much you can give away each year.
As a rule, you can pass your estate to your spouse or civil partner when you die, and there will be no inheritance tax to pay. There is no limit to how much can be transferred, although the amount liable to inheritance tax is deferred until the death of the second spouse. For this reason, many couples decide to make gifts of some of their estate to their children and grandchildren rather than giving it all to their spouse.
Exemptions From Inheritance Tax
You are permitted to give away assets of up to £3,000 per year and they will not be added to the value of your estate. This is known as your annual exemption. Any part of this exception that is not used in the tax year can be passed on to the following year, but this can only happen for one year. Gifts worth more than £3,000 might be subject to IHT. You can also make as many gifts of £250 to as many individuals as you like and these will not be subject to the tax, provided the recipients have not used other exemptions.
There is also a number of other gifts you can make that will be exempt from IHT. These include:
Wedding Gift - this has to be made before not after the wedding and can be up to £5,000 to a child, up to £2,500 to a grandchild or great grandchild and up to £1,000 to another relative or friend.
Gifts for Living Costs - gifts paid to help with the living costs of a former spouse, elderly parent or child in full-time education may be exempt from IHT.
Gifts from Surplus Income - if you have more than enough money to support your living costs you can make regular gifts from your surplus income. For example, perhaps you want to pay into the account of an elderly relative or make regular contributions to a child's saving account. The rules surrounding gifts from surplus income are complex but the important thing to remember is that the gifts must be regular. Also, be sure to keep up-to-date and accurate records of these money transfers.
Other Exemptions - gifts made to charities, political parties, universities, for national purposes and for the benefit of the public.
Potentially Exempt Transfer
Potentially Exempt Transfers (PETs) allow an individual to pass on assets and gifts of unlimited value. If they survive for seven or more years after the gifts were made, they are exempt from IHT. There is no tax to pay at the time of transfer, only if the person making the gift dies within seven years.
- If you die within three years of making gifts, a tax of 40% is charged on them. If you die within three and seven years, there is a sliding scale known as ‘taper relief.’
- Between three to four years, the tax is 32%.
- Between four to five years, the tax is 24%.
- Between five to six years, the tax is 16%.
- Between six to seven years, the tax is 8%.
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