Inheritance tax (IHT) is paid on an estate where the value exceeds £325,000. If you are married or in a civil partnership, on death, your allowance can go to your spouse or partner so the IHT threshold could become £650,000.
For farms, (from April 2026) the threshold is £1 million. If you are married or in a civil partnership, on death, your allowance can go to your spouse or partner so the IHT threshold could become £2 million. And with the tax-free allowance for residences, and the allowance that can be applied to all types of assets, the IHT threshold could be £3 million.
Instead of leaving their entire estate in a will, many people choose to give away some of their assets before they die. It may help family members in need, and may mitigate how much Inheritance Tax (IHT) is paid on the estate.
If you give away assets, and you die 7 years or more after, no IHT will be paid on those gifts. However, there are other rules and allowances that make this area of law complicated. Here we give the briefest of oversights.
So, what are the rules of gifts?
- Gifts given less than 7 years before you die may be taxed.
- But this is not the case for gifts to:
- Spouses or civil partners who live in the UK
- Charities (or political parties).
- Gifts include:
- Money
- House, land or buildings
- Personal items, e.g. furniture or jewellery
- Stocks and shares listed on the London Stock Exchange, and unlisted shares held for less than 2 years.
- Even if you die within the 7 years, there is a taper system, so the tax rate is reduced:
- If you die after 7 years 0% tax is paid
- 6 to 7 years 8%
- 5 to 6 years 16%
- 4 to 5 years 24%
- 3 to 4 years 32%
- Less than 3 years 40%
- You can give away a total of £3,000 worth of gifts each tax year as your annual exemption. Even if you die after a year, these gifts are exempt from tax.
- You can give as many gifts up to £250 per person per tax year, as long as you haven’t used another allowance on one of those people. This is the small gift allowance.
- You can give a tax-free gift as a wedding or civil partnership gift. This can be upto £5,000 for a child, less for other relatives or friends.
- You can give as much as you like on a regular basis, e.g. if you are supporting a child or elderly family relative, and this will be tax-free as long as it comes from your regular income.
More rules in brief
There are additional rules for carrying over unused annual exemptions. And you can combine allowances, e.g. an annual exemption plus a wedding gift.
A gift can include any money lost when you sell something for less than it’s worth, e.g. if you sell your house to your child for less than its market value, the difference counts as a gift.
Birthday or Christmas gifts you give from your regular income are exempt from IHT.
You can give as much as you like on a regular basis, e.g. if you are supporting a child or elderly family relative, and this will be tax-free as long as it comes from your regular income.
If you give something away but still benefit from it (a gift with reservation, e.g. giving your home to a relative but still living there), this is liable for IHT.
The rules on gifts are complicated, and numerous, but important to understand if you are considering giving away your assets. And there are different rules on trusts.
If you are interested in gift-giving, we’d be happy to explain further and guide you through the process. For further information, please contact Jenny Barron on 01756 692866 or email jenny.barron@awbclaw.co.uk.
18 November 2024
Intestacy – the question of inheritance
Have you put your affairs in order?
Do you know where your pensions are?