The average inheritance tax bill can run to tens of thousands
The average inheritance tax bill is expected to increase by £34,000 next April. The HMRC charge is a steep 40% on your estate’s value, but giving away some of this value in specific ways before your death could exempt it from the charge.
Gifting correctly can mean the value of the gift is not counted for inheritance tax purposes, which can lower the value of your estate and ultimately lower the amount of inheritance tax that will be owed. However, gifting items incorrectly can mean it’s still counted for inheritance tax purposes despite your efforts.
Gifts may not be included for inheritance tax depending on:
- Who you give the gift to and your relationship with them
- The value of the gift
- When the gift was give
What is a gift?
In inheritance tax terms, a gift can includes a range of things including money, households and personal goods such as furniture or jewellery, houses, land, buildings, stocks and shares on the LSE and unlisted shares held for less than two years before your death.
If you sell something for less than it’s worth, this lost money can also be counted as a gift. For example, if you sell your home to your child for less than its market value, the difference between what the paid and the value will count as a gift.
Birthday and Christmas gifts you give from your regular income are also usually exempt from inheritance tax. Anything left in your will doesn’t count as a gift. It is counted as part of your estate which is liable for inheritance tax.
If you give something as a gift but continue to benefit from it, it will be counted for inheritance tax. This includes situations where you give your home to your relative but continue living there, or give away a caravan but use it for free for a holiday.
Who you gift to
There is no inheritance tax due on gifts between spouses or civil partners, and no limit on how much you can gift, provided that they live in the UK permanently and you are legally married or in a civil partnership. Gifts given to charities or political parties are also not included in inheritance tax calculations.
Gifts for weddings are also not taxed but there is a limit of how much you can give according to your relationship with the couple. If they are your child, you can gift up to £5,000, but if they are your grandchild or great-grandchild you can only gift half of this without being taxed.
When the gift was given
Gifts given seven or more years before you die will not be counted for inheritance tax. If you die within seven years of gifting it, it will be taxed on a sliding scale known as taper relief, ranging from 8% to 32%.
However, if you die within three years of giving a gift, these will be taxed at 40%. This is known as the seven year rule.
The Government advises keeping record of the gifts you give, including the recipient, value and date you gave it, to make it easier to figure out if there is tnheritance tax owed on it.
