Life can be taxing at times, no more so than on death. So it is important to consider the potential inheritance tax implications which can arise upon your death.
When you die, Inheritance Tax may be payable on your estate. Each person has a Nil Rate Band of £325,000, meaning that any assets up to this value are charged at 0% inheritance tax. Anything above this value has a charge to Inheritance Tax of 40% unless exempt.
Married couples and registered Civil Partners, however, are allowed to pass assets to each other during their lifetime or when they die without having to pay Inheritance Tax. This is known as the spouse or civil partner exemption. Although the current inheritance tax threshold is £325,000 per person, it doubles to £650,000 for such couples – as long as the first person to die leaves their entire estate to their partner.
There are various different ways in which you can arrange your affairs in order to reduce a potentially significant Inheritance Tax liability. This article focuses on lifetime gifting per tax year
- Lump sum gifts up to £3000 (known as the annual allowance )
Each tax year you can give away up to a total of £3,000 of gifts, with these falling outside of your estate immediately. You can also gift larger sums of money and, provided you live for seven years after the date of gift then these gifts will also fall out with your estate. It is also possible to use the previous year’s tax exemption in certain circumstances
- Gifts that are worth less than £250 (known as “the small gift exemption”)
You can give as many gifts of up to £250 to as many people as you want, although not to someone who has already received from the £3,000 annual exemption. This type of small gifting is exempt from Inheritance Tax.
- Wedding gifts
If this type of gift is to be effective for inheritance tax purposes, it has to be made before the wedding. It also has to be given in the following way:-
- Given to a child and is worth £5,000 or less,
- Given to a grandchild or great-grandchild and is worth £2,500 or less, or
- Given to another relative or friend and is worth £1,000 or less.
- Gifts to charity
Another, often overlooked, way to reduce Inheritance Tax is to give gifts to charity. There is no limit as to how much and how often you can give to a charity without incurring Inheritance Tax. You could also get some relief on other types of tax, such as Income Tax, when you do this.
If you leave 10% or more of the ‘net value’ of your estate to charity on your death, then it is possible to reduce the rate of Inheritance Tax applicable to the remainder of your taxable estate from 40% to 36%.
- Regular gifts from excess income over expenditure
Regular and habitual gifts out of vouched excess income are subject to HMRC scrutiny following your death but if set up properly should be free from Inheritance Tax. Provided there is consistent gifting in this manner, the payments will qualify. More importantly, unlike some other forms of gifting, you do not have to survive for the usual seven years and these gifts do not reduce your nil rate band.
Should you wish to discuss your own situation, please do not hesitate to contact a member of our Private Client team who would be more than happy to assist you.