If your estate is worth more than the Inheritance Tax (IHT) threshold of £325,000 (or £650,000 for married couples and Civil Partners) it is likely that, when you die, your estate will be subject to IHT at 40%. One of the most straightforward ways to reduce the IHT liability, on your estate, is to give away some of your assets while you are still alive; these are known as ‘gifts.’
Gifts may or may not be taken into account when calculating the IHT liability, it all depends how much was gifted, to whom and whether or not the gift is out of income or capital.
In terms of ‘cash gifts,’ you can give up to £3,000 in each tax year that you remain alive. If you didn’t use your previous years allowance, you can carry it forward to give you a £6,000 allowance BUT you couldn’t do this for a second year running to give you £9,000; the allowance may only be carried over once. Naturally, as a married couple or civil partnership your annual allowance doubles up to £6,000 and £12,000 if carried over.
Gifts of any amount may not be taxable, provided you do not pass away within 7 years. If you do pay within 7 years of making a large gift the amount gifted will be subject to IHT subject to a ‘Taper Relief’ system. If you die within 3 years IHT will become payable at the full 40%. This would then reduce to 32% (3-4 years), 24% (4-5 years), 16% (5-6 years), and 8% (6-7 years).
In addition to your IHT annual gift allowance, you can give away a series of small gifts of up to £250 which are tax free for the recipient. The number of these you can make is unlimited. However, you can’t give to an individual, who has already benefited from your £3,000 IHT allowance, a further £250 gift during the same year.
You can also make ‘Wedding Gifts;’ these can be up to £1,000. For your grandchildren, the amount increases to £2,500 and for your own children £5,000. You have to make the gift before the wedding and the wedding has to go ahead! If you wish to make Gifts to UK established charities, national museums, universities, amateur sports clubs and political parties (with at least two MP’s), living costs for a child under 18, elderly parents all such gifts are not liable to IHT.