It is a mistake to think that Inheritance Tax (IHT) can be avoided by giving away assets during your lifetime.
While it may often be the case that it is beneficial to pass on gifts during your life, you need to be aware that there could still be an IHT liability.
The tax rules on lifetime gifts
Gifts of cash or valuable items made in the seven years before death may need to be counted when the estate executor calculates IHT liability.
Up to £3,000 can be given tax-free each tax year, or £6,000 if no gift was made the previous year.
Each parent can give their child £5,000 tax-free towards a wedding, and a grandparent can give £2,500 and other relatives £1,000 towards a wedding.
When a gift is given in the seven years before death, it will need to be included in estate calculations for IHT. It is the job of the executor or administrator to find out what gifts have been made and account to HM Revenue & Customs for any IHT that may be due.
Where gifts exceed the amount allowed to be given free of tax, then they will be deducted from the nil-rate band, ie. the amount an individual can leave tax-free on their death. The figure currently stands at £325,000.
There is a sliding scale for calculating the amount of IHT payable on gifts. Where the sum was given less than three years prior to death, then IHT is payable at 40 percent. In the three to four years before death it is 32 percent and the sliding scale continues for each year at rates of 24 percent (four to five years), 16 percent (five to six years) and 8 percent (six to seven years).
Small gifts of £250 or below can be given free of tax, as can gifts made from income you receive and maintenance payments made to relatives or ex-spouses.
Tax-free giving to spouse or civil partner
As your whole estate can be passed free of IHT to your spouse or civil partner, it follows that lifetime gifts to them are also free of tax. However, if you put money into a trust, this may create a tax liability. It is a complex area of law and it is advisable to speak to an expert tax and trusts lawyer.
An experienced adviser will also be able to help you make the most of IHT allowance and suggest ways of structuring your assets to minimise the amount of tax payable. When done properly, this can make a substantial difference to your liability.
It is also possible to appoint a professional executor who would be responsible for calculating IHT liability and preparing estate accounts.
If you would like to speak to one of our expert tax and trusts professionals, ring us on 01634 353 658 or email us at [email protected].