When making a gift or series of gifts to a family member, friend or other individual one dreary thought sitting at the back of your mind might be… will this gift become liable for Inheritance Tax after I have passed away?
As with every good question it can depend on your personal circumstances. However, there are a few known rules that may surprise and ease your concerns.
It is important to start with what counts as a gift. In HMRC’s eyes the following would be considered gifts:
• Money
• Household and personal goods such as furniture, jewellery or antiques
• House, land or buildings
• Stocks and shares listed on the London Stock Exchange; and
• Unlisted shares you held for less than 2 years before your death.
Now let us turn to some of the little-known rules which could surprise you.
Firstly, there is no tax due on any gifts you give if you have lived for 7 years after giving them. This means that you could have given a significant gift before the 7 years prior to your death, and it is not taxable for the purposes of Inheritance Tax. However, this does not include gifts made into a trust which would need to be explained in a separate article.
If you were to predecease the 7 years after making a gift, then the value of the gift may then ‘eat into’ your individual nil rate band which is currently £325,000 per person. There are of course other nil rate bands to be considered such as your residential nil rate band should you leave property to a living descendant and possibly any unused spousal nil rate band which in total could add up to £1 million. However, many of you may note £1 million of an individual’s Estate is becoming a more attainable target reached today.
The good news is that the gifted amount that may be considered taxable may vary depending on how many years you survived after the gift was made. This is otherwise known as ‘taper relief’.
Taper relief is a separate tax relief which can become applicable on a gift if made within the 7-year period. The idea is to reduce the rate of tax applicable on the gift depending on when it was made. To illustrate this, I have provided a table below showing the current rate of tax applicable to gifts made during certain years:
Years between when gift was made and date of death: Rate of tax applicable to the gift:
3 – 4 years 32%
4 – 5 years 24%
5- 6 years 16%
6 – 7 years 8%
7 or more 0%
Further more, not all gifts are taxable.
• Gifts made between spouses or civil partners are not taxable if they live permanently in the UK, and you are legally married, or they are in a civil partnership with you;
• Birthday or Christmas gifts made from regular income are exempt;
• Small gifts up to £250.00 per person is not taxable;
• Regular payments to help another with their living costs are also exempt provided you can afford the regular payments;
• Gifts made to someone who is getting married or starting a civil partnership are also not taxable up to the following limits:
1. Gifts made to a child (£5,000);
2. Gifts made to a grandchild or great grandchild (£2,500); and
3. £1,000 to any other individual.
If you have made a gift which is not exempted (for example making a gift towards a relative’s house deposit) then you may be able to rely on your annual exemption. Every individual in the UK receives an annual exemption of £3,000 in each tax year. Furthermore, if you have any unused annual exemption left over from the previous tax year you may be able to carry this over meaning you could use up to £6,000 to mitigate the value of any gifts made.