Inheritance Tax is a tax on the estate of someone who has passed away and includes all property, possessions and money. At present, if the value of your estate exceeds £325,000, you will be taxed at 40%, a rate which increases with the value of your assets.
One way to offset this is by leaving 10% of the total value of your estate to charity. Another way is to gift assets to loved ones while you are still alive, although the law surrounding this area can often seem complex and overwhelming.
Putting plans in place now can reduce the amount of stress on family members in the event of your death, therefore it is important to be aware of the limitations in place before making arrangements. Here, we’ve answered some of the most common questions surrounding gifting and Inheritance Tax.
Can I give anything to my partner or spouse?
If you are part of a civil partnership or are married, you will be able to pass your estate on to your partner without incurring any tax charges. This means that regardless of the amount, your estate will be exempt from Inheritance Tax. You will also be able to pass any unused tax-free allowance on to your spouse.
What about my family or children?
While you are alive, you have a gift allowance of £3,000 per year which can be used to gift assets or money to family, friends or children. If this allowance goes unused, it can be carried over to the following tax year but must be used within the two-year timeframe. If this allowance is exceeded, it may be subject to Inheritance Tax.
The most important thing to note is that a gift will only remain tax-free if you live for more than seven years after the gift is made. If you pass within this time, Inheritance Tax will be charged.
When a gift is made, it will be classed as a Potentially Exempt Transfer, this will change to a Chargeable Transfer should you pass away within seven years.
What if I pass away in seven years?
If you were to pass within three years of a gift being given, a 40% charge will apply. Gifts made between three and seven years are taxed on a scale known as Taper Relief. This means that a reduced rate of Inheritance Tax will be payable on the transfer of the money or assets. This doesn’t reduce the value of the gift, only the tax payable.
What else can I give tax-free?
- Gifts up to the value of £250 will remain tax-free so long as it isn’t sent to a recipient of your £3,000 tax-free allowance.
- Wedding gifts under £5,000 are exempt as long as they are made to a child before the wedding. This limit changes to £2,500 for grandchildren or great-grandchildren, or £1000 for friends and other relatives.
- Gifts which are given to assist with the living costs of an elderly dependent, ex-partner or child may be exempt.
- Regular gifts from your surplus income may be exempt so long as they stay consistent. This includes paying into your child’s savings account, paying your grandchild’s school fees or paying a life insurance premium for your partner.
Can I gift property?
Gifting property becomes a more complex matter when considering Inheritance Tax. If you continue to live in the property after gifting it, it will still be considered part of your estate and, if it hasn’t been your main residence for the entirety of the time you have owned it, the family member may need to pay Capital Gains Tax and/or Stamp Duty if there is an outstanding mortgage.Â
Can I leave a gift to charity?
If you are considering leaving a gift to charity, you will be pleased to know that this is completely free of Inheritance Tax. If the gift given totals 10% or more of your estate, the rate of Inheritance Tax you pay will be reduced to 36%.
What can I do to make the gifting process easier?
It is important to document the gifts you make, including what you gave, who you gave it to when you gave it and how much it is worth. This will ease any challenges during probate when calculating what is liable for tax.
Getting help from Curtis Whiteford Crocker
At Curtis Whiteford Crocker, we provide help to people in Devon on all aspects of inheritance tax, from whether you are leaving money to children, grandchildren or an unmarried partner. Our friendly team is here to advise during tax planning.
Get in touch with one of our offices in Plymouth, Torpoint, Tavistock, Plymstock or Kingsbridge and let us help you look ahead.