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Inheritance Tax – Gifts and Exemptions Explained

The start of a new tax year is the ideal time to review your current finances, investments and consider your plans for the future. It’s also a good opportunity to think about gifting to your family and to understand the UK tax laws around it. Investec Private Bank Tax Counsel, Alkesh Shah provides a high level summary of the impact of UK inheritance tax (IHT) on gifting and available exemptions.

When is a gift a tax-free gift?
Many individuals like to support their children, and there are myriad ways to do this. How much you give to your family is, of course, up to you, but it’s worth considering incorporating gifting as part of your investment objectives.

So firstly, let’s look at the definition of a gift. Very broadly, a gift is anything that has a value, be it money, property or possessions. It also refers to the difference in value when something is transferred. For example, if a parent sells a house to their child for less than the property’s market value, the difference will be regarded as a gift.

What happens when you die?
Non-exempt gifts above the UK’s IHT tax free threshold are subject to UK IHT, with the amount of tax dependant on when the gift was given. If your death is within seven years of giving a gift, the recipient could face paying up to 40 percent tax, reducing via a sliding scale called ‘taper relief’, explained in the below table.

Years between gift and death

Tax paid

less than 3

40%

3 to 4

32%

4 to 5

24%

5 to 6

16%

6 to 7

8%

7 or more 0%

 

However, if you are still alive seven years after gifting – the gift known as a ‘potentially exempt transfer’ will become exempt and no IHT will be payable.

The current IHT threshold is £325,000 but increases to £450,000 if the gift relates to your main UK property residence.

Looking for a new perspective on your financial future?
Make an appointment with an Investec Private Banker.

UK IHT Exempt gifts
Whilst the 7 year gifting rule is important, it is also worth bearing in mind that the UK provides the following exemptions from an IHT perspective.

  • The UK provides an annual IHT gift allowance, which allows parents to give cash to their children every year up to the sum of £3,000 in total. Any unused allowances can be then be carried forward to the next year only.
  • Smaller gifts of up to £250 a year can be given to anybody, but this cannot be gifted in addition to another exempted allowance for that person, such as the £3,000 allowance.
  • Regular payments to children under 18 or elderly relatives to assist with living expenses along with normal gifts such as birthday and Christmas presents are exempt as long as these are funded from your taxed income and must not significantly impact your own standard of living.
  • Parental contributions to a child’s wedding of up to £5,000 are also exempt gifts. Grandparents and great-grandparents can also give exempt wedding gifts of up to £2,500; whilst non-relatives can gift up to £1,000.
  • Gifts between spouses or civil partners living in the UK are potentially IHT exempt.
  • Gifts to political parties or charities.

IHT is a complex tax area so it is important that you seek professional tax advice to ensure you fully understand the tax rules and how they apply to you based on your own personal circumstances.

Alkesh Shah is Tax Counsel at Investec Private Bank. Photograph credit: Getty Images.

Disclaimer
This article is for general information purposes only and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisors if you need further advice or assistance.