3 things to consider when making inheritance tax gifts

Cruises on the Pacific, making new memories with the family and... inheritance tax gifts?

In life there could be many things to look forward to, but there’s one thing you should consider if it's likely that your estate could be affected by inheritance tax: inheritance tax gifts.

With less than half of UK gifters understanding the IHT rules applying to their biggest gifts, we thought it was the perfect time to help you fill in the gaps.

Why do I need to think about Inheritance Tax Gifts?

Most people's estates with a valuation over £325,000 will be affected by Inheritance Tax (IHT) when they pass on. It applies to your estate before any assets are left for beneficiaries. These assets may include the cash you have in the bank, property and businesses, vehicles, jewellery and life insurance payouts. But, it’s possible to make certain types of gifts in your lifetime which will reduce the overall value of your estate.

So as you’ll have gathered the current individual threshold is £325,000, and double for married couples. Which means married couples can leave a home behind, worth £650,000 without attracting inheritance tax. Any assets exceeding that will typically be taxed at a rate of 40%. Where a death occurs on or after April 6th 2017, an additional nil rate amount called 'the residence nil rate band' could be available. Here at Skipton we can help you get to grips with this.

Basics of Inheritance Tax Planning

Watch our video to learn more about the basics of Inheritance Tax Planning.

With thoughtful use of gifts, you might be able to reduce the value of your estate for IHT purposes. Here are some tips to help you make the most of inheritance tax gifts.

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1. The 7 Year Rule

Anything you gift 7 or more years before you pass is likely to be exempt from Inheritance Tax. Just as long as it’s to people, not businesses or trusts.

Should you pass on before the 7 years is complete, the gift is included in your estate but with a reduced tax rate if it’s been 3 or more years since you gifted it.

The sliding scale is known as Taper Relief, and offers 8% tax at 6-7 years, 16% at 5-6 years, 24% at 4-5 years, 32% at 3-4 years, and the full rate of 40% at less than 3 years.

One thing to be aware of: if you continue to benefit from a gift (such as living rent-free in a home), then it won’t be exempt. If you’re not quite sure where you stand, speak to an adviser.

2. Which gifts are always tax-free?

Not everything needs to be planned so far in advance, thankfully! These are always exempt:

  • Gifts to your spouse
  • Gifts of up to £250 to different individuals
  • Donations to qualifying charities or political groups
  • Gifts from new income after tax, not existing assets
  • Wedding gifts (£5,000 per parent, £2,500 per grandparent, £1,000 for others)

In addition, every gifter gets a £3,000 per year gifting allowance after the 7 year cut-off. So if your collective gifts for a year fall under, they’ll also be exempt. Anything you don’t gift will also roll into the following year’s allowance.

Mark Butterworth

There’s a great deal of complexity involved with inheritance tax planning and it’s important you make the right decisions. So speaking to a professional is recommended and can really strengthen your plans. With some careful planning, you can actually address inheritance tax so your loved ones don’t face an unexpected shock.

Mark Butterworth, Head of Financial Advice Planning and Research.

3. Keep records, get advice, feel better

You’ll need to keep clear, easily-found records for all of your gifts. After all, you wouldn’t want your family to be missing out on the benefits you’ve planned so well. Make sure that your family know what your plans are, and where to find important documents and files.

Every individual is different, and there’s no one plan for every IHT situation. So find an adviser you trust, and ask as many questions as you need to.

Then, once the planning is all taken care of, you can get back to the important business of enjoying life. Whether you’ve got a plan in mind and just need to look at the finer details—or you’re at square one, you can call us for a free initial chat as soon as you’re ready. You’ll find more useful free advice in our newsletter too, sign up here to stay clued up.

Important Information

The Financial Conduct Authority (FCA) does not regulate Trust planning, Will writing and most forms of inheritance tax planning. Some IHT solutions put your capital at risk, so you may get back less than you invested. IHT thresholds depend on your individual circumstances and legislation, both may change in future.

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