Inheritance Tax and Gifts
There is usually no Inheritance Tax payable on lifetime gifts. Certain gifts are exempt. Others may be taxable immediately (lifetime chargeable transfers) or become chargeable if you die within 7 years of making the gift. In certain circumstances, it may be necessary to look back up to 14 years before death to assess if a gift has become chargeable. The order in which lifetime gifts is made can be important, especially if some gifts are into a trust
Lifetime Chargeable Transfers
If you make a gift to a trust, then apart from a few exceptions, the gift will be taxable if its value (or the cumulative value of relevant gifts) exceeds the nil rate band (£325,000). The effective rate of tax on lifetime chargeable transfers is 20% and is payable by the settlor ie the person making the gift. If you die within 7 years of such a gift, additional tax will become due but it may be tapered. The additional tax liability falls on the Trustees.
Potentially Exempt Transfers
You can make other gifts in your lifetime of any value and provided that you survive the making of those gifts by 7 years, they will be exempt. If the value of lifetime gifts exceeds £325,000 and you die within 7 years, some or all of those gifts will become taxable on death. If you survive the making of a gift by at least 3 years, then the tax that is due is tapered. It is the recipient of the gift(s) who is responsible for paying the tax.
The following are exempt:
Gifts between spouses, irrespective of the value and provided the recipient is domiciled in the UK
£3,000 each tax year (annual exemption). If you have not used the allowance in the previous tax year, then you can go back one year. Also remember that this exemption does not apply to each recipient but to you as the donor.
£5,000 for a child on their marriage or civil ceremony (£2,500 for a grandchild or great grandchild and £1,000 in any other case).
Normal gifts out of income. You must be able to maintain your standard of living and you must not dip into your capital to do so. It is a good idea to keep a record of such gifts in your lifetime as your executors will have to show to HMRC that these gifts were genuinely made out of income. This means that there has to be an intention to continue to make gifts.
Payments to help with another person’s living costs. This will usually be by a parent to a child under 18 or to an elderly relative.
Gifts to charities and political parties.
Small gifts up to £250. You can make as many gifts up to £250 to different people during the tax year. This cannot be used in conjunction with another exemption
Speak to our Wills, Trusts and Probate specialists.
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