North Devon private client solicitor, Vanessa Swales, looks at inheritance tax planning and lifetime gifts
Inheritance tax is the tax that is paid on someone’s estate when they pass away. If your estate is worth more than £325,000, it may be liable to inheritance tax. The current (December 2023) rate of inheritance tax is 40%.
One of the simplest ways to avoid an inheritance tax bill is to give away assets during your lifetime.
Tax Allowances
- Annual exemption
Everyone has an annual exemption of £3,000, meaning you can give away a total of £3,000 each tax year, either to one person or split between a number of people. You can carry any unused exemption forward for one tax year only.
- Small gift allowance
You can give as many gifts up to £250 as you want each tax year, provided you have not used another allowance on the same person.
- Wedding and civil partnership gifts
The following tax-free gifts can be given to someone who is getting married or entering into a civil partnership:
- £5,000 to your child;
- £2,500 to your grandchild; and
- £1,000 to anyone else.
This allowance can be combined with your annual exemption but not the small gift allowance.
Exemptions
- Gifts to your spouse or civil partner
There is no inheritance tax payable on gifts between spouses or civil partners. You can give them as much as you like so long as they live permanently in the UK and they are legally married or in a civil partnership with you.
- Gifts to charities
Gifts to UK registered charities are exempt from inheritance tax, as are gifts to political parties and registered community amateur sports clubs.
- Gifts from surplus income
Subject to certain conditions, regular gifts made from surplus income are exempt from inheritance tax. The gifts must be made out of your net income and be part of your normal expenditure. In addition, you must be left with sufficient income to maintain your usual standard of living without resorting to savings or capital.
- Potentially Exempt Transfers
Most other gifts you make during your lifetime are classed as potentially exempt transfers (PETs). If you survive for seven years after making a PET, no inheritance tax will be payable. However, if you die within seven years of making the gift, the value of the PET is included in your estate for inheritance tax purposes.
Your nil rate band inheritance tax allowance, currently (December 2023) £325,000 for an individual, is applied to PETs before the rest of your estate so, unless you have made gifts in excess of your allowance, the recipients are unlikely to pay inheritance tax. However, if you make PETs exceeding your nil rate band allowance, any inheritance tax due on the PET as a result of your death is normally payable by the recipient of the gift. Taper relief may be available depending on when the gift was made.
Gifts in which you retain a benefit
If you give an asset away but retain a benefit in it (for example if you give your home to your children but continue to live there rent free) the asset will still form part of your estate for inheritance tax purposes when you pass away.
How we can help
Lifetime gifts can be a useful inheritance tax planning tool but there are other considerations, such as capital gains tax and the deliberate deprivation of assets. If you are thinking of making gifts during your lifetime, it is a good idea to seek specialist advice and guidance.
For further guidance from on inheritance tax planning and lifetime gifts from North Devon private client solicitor Vanessa Swales.
