Can you reduce the value of your estate for Inheritance Tax purposes?
If you are looking to reduce the value of your estate for Inheritance Tax purposes, making lifetime gifts to your family and friends can be a good way to do so.
There are different ways you could consider making gifts in order to reduce your estate and consequently the inheritance tax liability on your death, in particular:
- Gifts out of surplus income
- Small gifts of less than £250 to any one person
- Wedding and civil partnership gifts.
- Annual exemption
- Potentially exempt transfers
Regular gifts out of income
Regular gifts are exempt from inheritance tax if made as part of your normal expenditure out of income. You must be able to show that after each gift, you still have sufficient net income to maintain your usual standard of living.
A regular pattern of giving is required, for example meeting annual school fees for a grandchild or paying the premiums on a life policy for another's benefit.
The big advantage is that there is no need to survive seven years from the date of each gift for it to be exempt from inheritance tax, however to make use of this exemption, it’s very important that you keep very good records of these gifts.
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
The exemption is only available if the gift to that individual does not exceed £250 in total. It is not possible to carry forward any unused portion to the next tax year.
Wedding and civil partnership gifts
Lifetime gifts on the occasion of a marriage or registration of a civil partnership are exempt up to certain limits. The amount of the limit depends on your relationship to the couple, for example:
- Each parent can give £5,000
- Each grandparent can give £2,500
- Any other person can give £1,000
You can give away £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’. Gifts that are worth more than the £3000 allowance are subject to Inheritance Tax.
If the annual exemption is (wholly or partly) unused for a particular tax year, the unused portion may be carried forward for one tax year only.
Potentially exempt transfers – the 7 year rule
You can make outright gifts of any size to anyone, and if you survive for seven years from the date of the gift, the gift becomes fully exempt from inheritance tax.During that 7 year period the gift is known as a “potentially exempt transfer” or PET.
However, if you fail to survive for seven years, the gift becomes chargeable and could use up all or part of your nil rate band.
Estate planning is a complex area. If you are considering making a lifetime gift then it is always best to seek independent legal advice beforehand. If you have any questions or wish to ask a member of our Private Client Team about lifetime gifts, please do not hesitate to contact us.