Many people give gifts in an attempt to reduce inheritance tax but it is so important to obtain legal advice prior to doing so, to understand which gifts are exempt and understand how much tax, if at all, your family may have to pay on those gifts.
Gifts can include property, money, and other possessions.
Most people are aware of the 7 year rule, i.e. any gifts made more than 7 years prior to the person dying are exempt, which is usually referred to as a potentially exempt transfer.
However, not all gifts are exempt.
Inheritance Tax Exemptions
Gifts that are exempt from inheritance tax include:
a. assets passed to a spouse or civil partner;
b. gifts to qualifying charities;
c. gifts of less than £3,000 or less in any tax year;
d. small gifts of £250 or less; and
e. wedding or civil partnership gifts.
As a bonus – if you leave 10% or more of your estate to charity, your family pay a reduced rate of inheritance tax at 36%, rather than 40%.
Interesting fact – outright gifts to UK political parties are also exempt, so long as the political party had at least 2 members in the House of Commons as at the date of the last general election before the gift.
Value of Gift
Before making a big gift by way of a transfer – be careful!
You should be mindful of the rule above mentioned, but do not think that selling, for example, a property, to a relative at an under value will mean you do not pay or pay less inheritance tax.
If a property is transferred at an undervalue, then the difference in value is the gift.
When calculating inheritance tax, if the total estate, including gifts that are not exempt, exceeds £325,000, then inheritance tax will be due.
Income Tax
There are also some who give a gift to a relative during their lifetime, but continue to receive a benefit from that gift, for example, rental income.
Your estate may then be liable for income tax.
There is the possibility to have relief from inheritance tax if the person who passed away owned a business, farm woodland, or a National Heritage property.
It is very important that you obtain legal advice before making such big decisions and ensure that you have the knowledge and understanding of what your decisions mean to your estate.
Please feel free to contact me to discuss your situation.
0207 183 4595
The information provided in this article is not intended to constitute professional advice and you should take full and comprehensive legal, accountancy or financial advice as appropriate on your individual circumstances by a fully qualified Solicitor, Accountant or Financial Advisor/Mortgage Broker before you embark on any course of action.
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