Inheritance tax can be reduced through making use of the gift allowance. Currently, this is at £3,000, and means you can give this much away, whether that’s in assets or cash, per year free of inheritance tax. This is also known as your annual exemption.
Gifts made more than 7 years before you pass away are also exempt from inheritance tax. In the 7 years leading up to death, inheritance tax increases depending on how long ago the gift was made. In the 3 years before death, inheritance tax is paid at 40%, aside from gifts and other exceptions to the rule.
What are the other exemptions from inheritance tax?
Helping with other’s living costs
One exemption to inheritance tax is payments that are given in order to help with the living costs of another person. This may include payments to a child who is under 18 or an elderly relative. It also accounts for payments to a former spouse or a relative who is dependent due to disability or illness.
Gifts for another person’s wedding or civil partnership
Another exemption to IHT, depending on the relationship with the person in question, is gifts that are given to those getting married or registering a civil partnership. These gifts must be given close to the date of the ceremony in order to qualify. This allowance goes up to a maximum of £1,000 per person, but increases to £2,500 for grandchildren and £5,000 for children.
Gifts between spouses and civil partners
As long as your spouse or civil partner lives in the UK on a permanent basis, gifts to them will not be charged inheritance tax.
Gifts up to £250
Gifts of up to £250 per person are, when made, inheritance tax free. This only counts for when you haven’t given the same person a gift under another tax-free allowance.
Gifts to charities
Gifts to charities that are registered in the UK, or political parties with at least two elected members in the House of Commons, are exempt from inheritance tax. This also includes national institutions such as universities or the national trust. As well as this, if 10% of your estate is left to charity, IHT reduces to 36%.
Normal gifts from your income
Gifts that are given out of your income, e.g. Christmas or Birthday gifts, are exempt from IHT. This rule applies as long as you are left with an adequate income to maintain your standard of living after making the gift.
It’s always a good idea to stay up-to-date with any changes to legislation that may affect your inheritance tax allowances. It’s also important to ensure that a record of gifts you make are clearly presented, and kept safe. If you’re looking for financial advice regarding reducing inheritance tax, inheritance tax rules and how they will affect you and your family, talk to our financial advice team. Please call on 01926 492406 or email us at firstname.lastname@example.org to make an appointment.