It is common knowledge that there is potential inheritance tax liability for gifts you have made in the last 7 years prior to your death. Gifts include cash, property, shares, vehicles, household and personal belongings. It also includes any monies lost when you sell something for less than it is worth.
There is no inheritance tax due on any gifts you give if you live for seven years after giving them (unless the gift is part of a trust). This is known as the seven-year rule.
If you die within seven years of making a gift and there is Inheritance Tax to pay (only if the gifts are in excess of your £325,000 allowance), the amount of tax due depends on when you gave it. The inheritance tax rate is 40% for gifts made in the three years before your death and for those made three to seven years prior to your death, they are taxed as per below on a sliding scale known as ‘taper relief’.
|
Years between gift and death |
Rate of tax on the gift |
|
3 to 4 years |
32% |
|
4 to 5 years |
24% |
|
5 to 6 years |
16% |
|
6 to 7 years |
8% |
|
7 or more |
0% |
Please note that any gifts you make that you are still benefiting from such as continuing to live in the house you have gifted, will form part of your estate for inheritance tax purposes.
- Spouse or Civil Partner Exemption
Any gifts made between spouses or civil partners, provided they live in the UK permanently, are exempt.
- Charity and Political Party Exemption
There is no inheritance on any gifts made to charities and political parties.
- Small Gift Allowance
You may make gifts of up to £250 to as many recipients as you wish in each tax year without needing to keep records. If any individual receives more than £250, the whole value of the gift must be taken into account. Additionally, any Christmas or birthday gifts you give from your regular income are exempt from Inheritance Tax.
- Wedding or Civil Partnership Allowance
You can give £5,000 to a child and £2,500 to a grandchild or great grandchild and £1,000 to anyone else who is getting married or entering a civil partnership in each tax year.
- Annual Allowance
You have an allowance of £3,000. Gifts to one, or more, recipients to a total value of £3,000 will not reduce your Inheritance Tax allowance or be subject to the seven-year rule. For example, you could give one child/person £3,000, or you could give your two children/people £1,500 each and this will not count towards your inheritance tax allowance.
If you have not used your allowance for the previous tax year you can carry forward your unused allowance for one year only. Any unused allowance not carried forward will be lost. Therefore, if you have not used an allowance for the last two tax years you can gift a total of £6,000 away up until the end of the tax year (5th April). Then on 6th April you can also use your new allowance of £3,000.
If the value of all gifts in a tax year exceeds the annual allowance, the excess will reduce the amount of tax-free allowance available for your estate.
- Gift out of Surplus Income
If you have good pension and investment income and do not spend all of your income which means that it is just accumulating as capital, then you can also gift this income in addition to your annual allowance. You will need to keep careful records of your outgoings to show your surplus and the amount of surplus that is gifted.
It is important to keep a detail record of the gifts you have made (what you gave, how much you gave/the value, when you gave and to whom) so that the appropriate exemptions/allowances can be used to minimise any inheritance tax liability on your death.