What gifts are exempt from inheritance tax?
An efficient way of reducing your estate for inheritance tax (‘IHT’) purposes is to make lifetime gifts. Gifts could be in the form of cash, property, shares, and/or personal possessions.
Gifts between spouses are usually made tax free. There is an exception if one spouse is resident in the UK and one is not, though this is usually quite rare.
If you give away an asset of any value to another person or a specified trust, have no further interest in that asset (e.g. you do not retain any income or benefit from it), and survive for 7 years, then the value of the gift becomes exempt from inheritance tax on your death. This is known as a potentially exempt transfer (‘PET’). If you retain a benefit in the asset, for example you gave away a property but continued to live in it, then this is known as a gift with a reservation of benefit, and the asset is never outside of your taxable estate, even after 7 years.
If you die within 7 years of making a PET, then the value is brought back into your taxable estate and will affect the IHT due on death. The effect is as follows:
- If the gift was worth less than your available nil rate band (‘NRB’), currently £325,000, then this has the effect of reducing the NRB available to your estate on death by that amount; or
- If the gift was worth more than your available NRB, IHT will be due on that gift and taper relief could apply to the tax payable if the gift was made more than 3 years before death. There would then be no NRB available to your estate on death.
You can give away the following without there being any IHT consequences, and you do not have to survive for 7 years:
- £3,000 per tax year to any recipient, which is known as your annual exemption. You can carry forward this allowance for one tax year if unused.
- £250 per person, per tax year. This is known as the small gift allowance. But this cannot be combined with any other allowance for the same person.
- £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person on the occasion of them getting married or entering a civil partnership. This can be combined with the annual allowance.
- Regular gifts out of excess income – you can make regular payments to another person without there being a limit on those payments, as long as the amount comes from your excess income. This must be carefully documented and must be genuinely paid from income you have left over each month. You cannot meet your own expenditure from your capital and give away your income, for example.
However, it is also important to examine the capital gains tax (‘CGT’) position of any gifts as giving away an asset is sometimes a deemed disposal for CGT purposes. It is, therefore, recommended that professional advice is sought before any gift is made to ensure it is being made in the most tax efficient way.
Disclaimer: The information contained in this blog is accurate at the time of publication. It does not constitute legal or tax advice. You should seek professional advice before making any gifts or taking action based on this content.