Where you have gifted in the seven years prior to your death, these gifts may be taxed or affect the inheritance tax due in your estate.
These gifts are called potentially exempt transfers (also known as PETs).
Gifts could be of money but also of personal items or property, or even if you were to sell something to someone for less than its true market value, anything which reduces the value of your assets.
The PET is the reduction in the value of your estate.
Gifts to spouses, civil partners and charities are exempt from inheritance tax, but gifts to others may come back into question to be assessed for inheritance tax unless any of the following allowances apply.
There are a number of gifting exemptions available which can assist with your inheritance tax liability, including:
Some of these allowances were set in the 1970s and early 1980s and have not been increased since.
However, despite the lack of their proportionate increase, they can still be useful mechanisms to help legitimately reduce the amount of inheritance tax payable in your estate.
Each person has an annual allowance of £3,000 per year, which we can gift from capital without being added back into our estate for inheritance tax assessment.
If you do not use your allowance for one tax year, then you can carry forward the allowance for one year only.
This is a total amount of £3,000 that can be used in one single gift or a number of gifts to a number of different recipients.
The allowance is per person, so as a couple, that's £6,000 per tax year.
You can gift up to £250 per person to as many people as you like, which will not affect your inheritance tax position.
(So long as you have not given any additional gifts to any of those recipients within the same tax year)
You can give a gift in a marriage or civil partnership, and special exemptions apply dependent on who it is getting married to.
For a child, the amount is £5,000. To a grandchild or great-grandchild, £2,500 and for any other person, £1,000.
With the average cost of a wedding standing at nearly £20,000 in 2022 and with 63% of couples saying they received money from friends or family towards the cost of their wedding (according to a survey conducted by Hitched.co.uk), this could be a very useful exemption to be aware of.
This exemption can often be overlooked, but if you have income that is surplus to your requirements to meet the costs to maintain your usual standard of living and you are happy to commit to a regular gift, then this can be exempt from inheritance tax assessment.
To apply for this exemption, your Executors would need to give a full breakdown to the HMRC of your income and outgoings for any tax year in question.
It, therefore, can be useful to keep track of this information to assist in this process should it become relevant.
To meet the" regular" requirement, the payment doesn't have to be the same amount each month, for example, but it has to be more than a one-off payment.
Generally, this will not be effective for inheritance tax purposes.
If you pass the ownership of an asset to another but continue to use or benefit from the asset, then it will be counted as a Gift With Reservation of Benefit (GWROB), and it will be included within your estate for inheritance tax assessment.
We each have a nil rate band available of £325,000.
This means that on the first £325,000 of value assessed for inheritance tax in our estate, £0 of tax will be due.
If you give away assets exceeding £325,000 and then die within seven years, then tax may be due on those gifts, which, dependent on the wording of your Will, may be payable by the recipient of the gift.
This is not something that is always considered when making a large gift.
Taper Relief can reduce the tax due on such gifts but does not reduce the amount taken into account.
If a gift is given in the three years preceding your death, there will be no reduction of inheritance tax, but if you die between 3 to 7 years from the making of the gift, taper relief will apply to reduce the rate of tax payable as follows:
3 to 4 years - 32%
4 to 5 years - 24%
5 to 6 years - 16%
6 to 7 years - 8%
7 or more -0%
Trusts can also be used to help provide gifts to family or friends and can be especially useful where you hold any assets that may benefit from business property relief or agricultural property relief for Inheritance tax.
Trusts can be used as a way of passing benefit to others without giving up control over the decisions regarding these assets.
The rules regarding trusts and these reliefs are complicated and are outside the scope of this article, but our team are here to assist should you wish to consider such issues in greater detail.
You should consider your position each tax year to ensure that you are utilising your annual allowances if you wish to do so.
You can help your Executors by keeping clear records of the amounts you give, to whom and when, so they have all the information they may need
If you need any advice on estate or inheritance tax planning, please get in touch with our specialist Wills, Trusts, and Probate team on:
