There are various exemptions and potential exemptions, which make it possible to make gifts free of inheritance tax. Making gift tax free is a useful way to reduce the value of your estate. Ultimately the inheritance tax may be payable on gifts.
What counts as a gift?
For inheritance tax purposes, a gift is anything that has value, for example, money, property, or possessions. An award may also arise if the value of your estate reduces following a transfer. For example, if you sell your house for less than it ‘s worth to your children, the discount factor is viewed as a gift.
Gifts to spouse
Present to spouses and civil partners are free of inheritance tax.
Gifts out of income
The exemption from inheritance tax for ‘usual out of income-expenditure’ is useful and can be used to make lifetime gifts tax-free. For the exemption to apply, the present must meet three conditions:
- It forms part of your regular expenditure.
- It is from income (taking with the next year).
- You left behind with enough income after the gift to maintain your usual standard of living.
An easy way to use this exemption, for example, would be to set up a standing order for a regular amount, say £X per month, to your children or grandchildren, or to meet the cost of school fees or similar.
Gifts made in this way are entirely exempt – you do not need to survive seven years to keep the tips tax-free.
Annual gifts exemption
There is an annual gift exemption for inheritance tax, which allows you to give away £3,000 of gifts in total—IHT-free in each tax year. If you did not use the exception in full in one tax year, the unused amount could be carried forward to the following year, after which it expires.
On the occasion of a marriage or civil partnership, you can make gifts tax-free, up to certain limits. The tax-free threshold for wedding gifts is £5,000 where the present is for your child, £2,500 to a grandchild, and £1,000 to someone else.
It is also possible to give gifts of up to £250 per year. IHT-free for as many individuals as you wish, if the beneficiary has not benefited from any exemption.
Other tax-free gifts
Gifts to help another person with their living costs, such as an elderly relative or a child under the age of 18, free of inheritance tax, as can individual gifts to charities and political parties, housing associations, gifts for social purpose and the public benefit.
Potentially exempt transfers
You can also give as much as you like away IHT-free – as long as you survive seven years. However, there are anti-avoidance rules where you have previously owned an asset or where you continue to retain the benefit of it. After you have given it away (for example, if you give your house to your children and continue to live in it rent-free), care must be taken not to fall foul of these.
If you survive less than three years after making the gift, IHT is payable in full at the usual 40% rate. However, if you survive more than three years but less than seven years from the date of the gift, taper relief reduces the amount of IHT payable. If you persist at least seven years from the time of the gits, it drops out of the account and is IHT-free.
Further notes: IHTA 1984, . 3A, 18 –26