Inheritance tax gift exemptions
There are quite a wide range of gifts that can be made to reduce your inheritance tax liability while you are alive as they are classed as Exempt gifts.
- Gifts from one spouse to another.
- Gifts out of normal income – these must be regular and habitual and from income, not capital – it is also sensible to write down your intentions for your executors.
- Annual £3,000 exemption – any part of this exemption not used can be carried forward to the following year only. However, the later year’s exemption must be used completely before using the part, which has been carried forward.
- Small gifting allowance of £250 to an unlimited amount of separate people (where people have not received £3000).
- Grandparents gifting allowance of £2,500 in consideration of marriages of grandchildren.
- Parents gifting allowance of £5,000 in consideration of marriage of their children.
- Gifts to charities.
- Gifts for national purposes, political parties, housing associations and certain transfers to employee trusts.
You could consider these as an effective, albeit limited, way to reduce your estate and therefore the eventual inheritance tax liability. However, these must be outright gifts and so you should ensure that they would not affect your income or security as you will forego the right to the income or capital in the future.
It is important to keep a written record of all gifts made. If applicable, advise your accountants of them so that they can be correctly dealt with from a tax and reporting point of view. This will also ensure you should benefit from any available relief.
Other gifts over £3000 per year from capital made directly are Potentially exempt transfers which fall back into your estate if you do not survive 7 years after making the gift.
Trusts and Gifts
Gifts into trusts are classified as Chargeable lifetime transfers in that should the gift exceed £325000 tax is immediately payable at 20%.
Do not make gifts into trust without proper and experienced advice as merely making gifts in the wrong order can potentially cause an increased tax liability and certainly don’t make a gift of your main residence without taking good advice.
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