Inheritance tax (or IHT) is due on any single person’s estate worth £325,000 or more, at a basic rate of 40%. If you’d like to manage how much of your estate goes on inheritance tax, gifts to family members, friends, charities and political parties before you die might be the answer. But you’ll have to follow certain rules to make sure that it’ll work out the way you intended.
Here’s a quick guide to IHT, gifts and exemptions to get you started.
The inheritance tax exemption for spouses
You can pass your entire estate on to your spouse or civil partner without any inheritance tax being taken. They can also inherit your right to pass on £325,000 without tax. So when your partner later dies, they can leave up to £650,000 (your tax-free allowance plus theirs) without being taxed on it.
For example: John and Mary are married. When John dies, Mary inherits his entire estate, and no inheritance tax is paid. When Mary dies, she is able to pass on up to £650,000 to their children without any inheritance tax being taken.
NB: If your estate includes property, you can now get an extension of your allowance thanks to new inheritance tax rules. As of 2018, you can pass on £125,000 more if property is passed to children or grandchildren.
But what if you’re not married? That’s where gifts come in.
The rules on gifts and inheritance tax
It can be tempting to give gifts to avoid inheritance tax, but these need to be planned very carefully. If you die within seven years of giving the gift, that sum may still be subject to IHT.
You have a maximum ‘gift allowance’, or inheritance tax exemption, of £3,000 per tax year. If you don’t use it, the amount you’re allowed to gift will roll over to the next tax year. However, you will have to use that £6,000 allowance by the end of the second year – or you’ll lose it.
If you die within seven years of giving gifts that exceed your gift allowance, those gifts will be subject to inheritance tax. The rates are as follows:
- 100% of the IHT is due if you die within three years.
- 80% of the IHT is due if you die within three to four years.
- 60% of the IHT is due if you die within four to five years.
- 40% of the IHT is due if you die within five to six years.
- 20% of the IHT is due if you die within six to seven years.
What is exempt from inheritance tax outside the gift allowance?
Gifts under £250: these are tax-free, provided they go to someone you know who hasn’t already received a part of your annual gift allowance.
Payments towards someone else’s living costs: such as helping an elderly relative with rent, or covering the living costs of a child under 18.
Wedding gifts: inheritance tax gifts to children, grandchildren, or other relatives or friends who are getting married are also exempt, provided they fall below the following thresholds:
- £5,000 for inheritance tax gifts to children
- £2,500 for inheritance tax gifts to grandchildren
- £1,000 for inheritance tax gifts to anyone else known to you
Regular payments made from your ‘surplus’ income: gifts given with money coming from your job or pension – are exempt from inheritance tax, as long as you can afford to give them without affecting your lifestyle. These must be made at regular intervals (such as Christmas and birthday presents) and well-recorded.
Charitable donations: no inheritance tax is payable on any amount of money given to charities, museums, universities and community groups. This can also apply to political parties, but there are certain conditions attached.
Things to watch out for:
- Whilst these types of gifts might not be subject to inheritance tax, the people who receive them might have to pay other types of tax – such as income tax or capital gains tax – on gifts that generate profit or interest, like shares.
- If you give your house away as a gift, you cannot continue living in that house for free. If you do, the house will be considered part of your estate when you die, which means inheritance tax will be charged if your estate is worth more than £325,000 in total.
- If you wish to make use of the inheritance tax exemptions above, it’s important to keep excellent records of any gifts you give that are beyond your gift allowance.
If you have any other concerns about gifts and inheritance tax, information is readily available from the government. Call the probate and IHT hotline for immediate help and advice.
Need help with probate and inheritance tax?
Completing inheritance tax paperwork can be confusing and time-consuming, but it’s a vital stage in estate administration. That’s why thousands of families work with us. We offer a range of fixed-price probate services that include IHT tax work as standard. Click here or call us on 0800 054 9896 to get a quote in minutes.