In the last year, Inheritance Tax receipts have risen sharply – soaring from £0.5bn to £4.1bn year-on-year between April and October.
This rate is likely to climb higher and higher due to rising house prices, inflation and the Chancellor’s decision to freeze Inheritance Tax allowances, such as the nil-rate band and residence nil-rate band, until 2028.
None of us wants to pass on a tax burden to our beneficiaries through our estate, but for more and more people it is becoming a reality, in large part due to the rising value of the homes that we own.
While there are many ways to mitigate a potential Inheritance Tax bill, with Christmas just around the corner, what better time of year than to look at the rules around gifting?
Annual Exempt Gifts
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can give gifts or money up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year – but only for one tax year.
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
You can also give a larger wedding gift to a child worth £5,000 or more prior to their nuptials and certain payments to help with a family member’s living costs, such as school fees, may be exempt as well.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
The Seven Year Rule
Taper relief or as it is more commonly known, The Seven Year Rule, applies tax to gifts you have made in the seven years prior to your death on a sliding scale.
If there is Inheritance Tax to pay, it is charged at the full 40 per cent on gifts given in the three years before your death. However, the rate of tax paid on gifts made three to seven years before your death is taxed at different rates as follows:
- 3 years or less – 40 per cent
- 3 to 4 years – 32 per cent
- 4 to 5 years – 24 per cent
- 5 to 6 years – 16 per cent
- 6 to 7 years – 8 per cent
- 7 or more – 0 per cent
While you cannot usually plan the date of your death, it is important to understand how this mechanism works and plan lifetime gifts accordingly.
Charitable Gifts
Any money or assets that you give to a qualifying charitable body, whether during your lifetime or in your will via a legacy donation, is exempt from Inheritance Tax.
What’s more, if you leave more than 10 per cent of your net estate to a charity after you die the rate at which tax is paid on the rest of your estate is reduced from 40 per cent down to 36 per cent.
Planning for later life should include a clear pension, savings and investment strategy, but ought to also consider your estate after you are gone.
It is highly advised that you seek independent advice if you anticipate paying Inheritance Tax as there is a lot that can be done to reduce the amount that is paid.