If you are concerned that there may be tax to pay on your estate after you pass away, then the relationship between inheritance tax and gifts is one that will be very important to understand. There are numerous exemptions available from inheritance tax and gifts are the most common form of exempt transfer, and careful use of gift allowances can help to greatly reduce the burden of taxation. However, it is worth keeping in mind that some kinds of gifts called 'gifts with reservation' will not become exempt and will remain subject to inheritance tax.
Inheritance tax and gifts are related as follows:
- There is an annual exemption for gifts of £3,000.
- There is an annual exemption for small gifts of £250 per recipient.
- Wedding gifts have varying sums of exemption depending on your relationship with the new couple.
- Gifts to charities and political parties are exempt.
- 'Potentially exempt transfers' are gifts that are not covered by other exemptions. They remain liable for inheritance taxation for seven years, but with reducing rates as time passes – if you survive for the full seven years after making the gift then it becomes fully exempt.
Gifts with reservation are those gifts that you continue to benefit from after having made, with the prime example being the gifting of a house to children while you continue to live there without paying market value rent. Gifts with reservation continue to be considered towards the worth of your estate for the purpose of calculating inheritance tax.
If you are concerned about inheritance tax and gifts, and how to best reduce the tax burden on your estate after you die, then fill out our online enquiry form for a free first consultation with no obligations. We'll put you in contact with expert UK financial consultants who can offer professional and qualified advice on your situation.