Gifting can sometimes be an effective way to reduce your future potential Inheritance Tax (IHT) liability after your lifetime. However, you only need to consider this if there would be a potential IHT liability after your death OR you have other genuine reasons to make gifts to other people.
Will there be an Inheritance Tax (IHT) Liability upon my Death?
This depends upon your circumstances as follows:
If you pass your estate value for the benefit of your surviving spouse (BUT NOT A PARTNER TO WHOM YOU ARE NOT MARRIED), then there shall be NO IHT liability as this would be exempt from any IHT assessment; or
If you are a surviving spouse (widow/widower), then you may pass estate value up to £650,000 to any combination of any people WITHOUT any IHT liability; or
If you are a surviving spouse (widow/widower) and you own your main residence which is passing to your direct descendants (children, grandchildren, stepchildren, step grandchildren, etc.), then you may pass estate value up to £650,000 to any combination of any people, PLUS the value of your main residence (up to a maximum value of £350,000) to your direct descendants WITHOUT any IHT liability; or
If you are NOT a surviving spouse (widow/widower), then you may pass estate value up to £325,000 to any combination of any people WITHOUT any IHT liability; or
If you are NOT a surviving spouse (widow/widower) and you own your main residence which is passing to your direct descendants (children, grandchildren, stepchildren, step grandchildren, etc.), then you may pass estate value up to £325,000 to any combination of any people, PLUS the value of your main residence (up to a maximum value of £175,000) to your direct descendants WITHOUT any IHT liability.
Therefore, the amount of estate value which people may pass upon their death, FREE of any IHT, usually varies between £325,000 and £1 million, depending upon their circumstances.
If your estate value is within these limits and you have no other reason to make gifts to another person or other people, then you need not consider making gifts.
What if I will Pay IHT when I Die?
If your estate would be subject to IHT upon your death, then to potentially reduce your IHT liability, you may consider making gifts to a person or people during your lifetime.
What gifts can I Make During my Lifetime?
We each have an Annual Gift Allowance (current maximum of £3,000) which can be made free of any future potential IHT implications. Also, if you did not make a gift of this amount in the previous financial year, then you may make up for this in the current financial year (currently a maximum of £6,000 in total); and
We may also make as many maximum gift amounts of £250 to as many different people as we wish from our regular income each financial year. This is conditional on the fact that you have not used another allowance on the same person in the same financial year. Birthday and/or Christmas gifts you give from your regular income are also exempt from IHT.
Beyond this, we may also make regular gifts out of our disposable income (excess income beyond that required to maintain our usual standard of living) which can immediately be exempt from future IHT because these are viewed by HMRC as regular gifts of INCOME rather than CAPITAL. Please seek professional advice on this method before taking any action in relation to it.
Gifts of Capital to a Person or People
Beyond the methods of gifting already highlighted in this article, which are usually comparably small in value, you can consider making gifts of your assets (or a proportion of them) to an individual person or various people on the following basis:
Provided that you gift an asset and retain NO further benefit (income and/or residential benefit) from that asset, then it shall no longer be assessed as part of your estate for IHT purposes once SEVEN (7) FULL years have elapsed from the date you made the gift. If you die during that 7-year period, then the IHT liability would apply as follows:
Death within THREE (3) FULL years of having made the gift, then 100% of the IHT liability would still apply; then
Death within FOUR (4) FULL years of having made the gift, then 80% of the IHT liability would still apply; then
Death within FIVE (5) FULL years of having made the gift, then 60% of the IHT liability would still apply; then
Death within SIX (6) FULL years of having made the gift, then 40% of the IHT liability would still apply; then
Death within SEVEN (7) FULL years of having made the gift, then 20% of the IHT liability would still apply; then
Death AFTER SEVEN (7) FULL years of having made the gift, then NO IHT LIABILILTY.
Please seek professional advice on this method before taking any action in relation to it.
Inheritance Tax Reduction by Gifting
PLEASE NOTE THAT IF YOUR ESTATE VALUE WOULD NOT BE SUBJECT TO IHT, THEN THIS 7-YEAR RULE DOES NOT APPLY BECAUSE EVEN WHEN ADDING THE FULL VALUE OF THE GIFTED AMOUNT BACK INTO YOUR ESTATE VALUE FOR IHT ASSESSMENT PURPOSES, THERE WOULD STILL BE NO IHT.
For further guidance, WITHOUT consultation fees nor obligation, then please visit our Inheritance Tax page.
For information related to gifts of capital into a Trust Fund, then please await our nest article coming soon.
TRF Wills (TRF) was created by Michael Cotterill in 2005. He is a member of the Society of Will Writers and registered with the Information Commissioner’s Office.