Inheritance tax rules, exemptions and gifts explained
Death and taxes – two topics that nobody wants to dwell on. But while the subject of inheritance tax is never going to be a dinner party conversation starter, it is an issue that most of us will have to get to grips with at some point.
Whether you wish to make tax-free gifts to loved ones while you're alive, or ensure they're provided for on your death, it's natural to want to maximise the amount that's received. Here we explain the rules around Inheritance Tax (IHT), and outline the various exemptions that can help keep the tax bill down.
What is the Inheritance Tax threshold?
IHT is only payable on estates valued at over £325,000. If the value of your estate is below this figure, it will fall into the nil rate band and won't be liable for IHT.
Above the £325,000 threshold, the IHT rate is 40%. So, for example, if your estate is valued at £750,000, 40% tax is payable on £425,000 (the tax bill in this example would be £170,000).
You won't be surprised to hear that this is the simplest scenario, and there are various reliefs and exemptions that can significantly lower the IHT bill. For example, if you qualify for the residence nil rate band, this could raise the 'IHT free' threshold to £500,000 (by April 2020 once fully phased in) or if you leave 10% or more of the net value of your estate to charity the IHT rate is reduced from 40% to 36%.
Whether or not you're married also makes a huge difference. When a husband, wife or civil partner dies, the value of their estate can be passed to the surviving partner completely tax-free. When the second partner dies, the £325,000 allowance for the first partner can be added to the other partner's tax-free allowance, raising the threshold to £650,000 (or £1 million after April 2020 if you qualify in full for the residence nil rate band).
Can I give tax-free gifts in my lifetime?
There is absolutely no limit to the gifts you can make to friends or loved ones. If you live for 7 years beyond the date of the gift, no IHT is payable. However, if you die within 7 years, the value of the gifts may effectively still count towards the value of your estate.
Certain gifts are always exempt from IHT, whether or not they are made in the 7 years before you die. Below, we've outlined the main exemptions . . .
Types of gifts exempt from inheritance tax
Feeling generous? Each tax year you can give away up to £3,000 worth of gifts - defined as cash or assets - without them being added to the value of your estate. Any unused 'annual exemption' can be carried over from one tax year to the next, but only up to a maximum of £6,000.
You can also give away:
- Wedding or civil ceremony gifts of up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 for another relative or friend
- As many small gifts of up to £250 as you like, to as many people you wish. However, bear in mind that this is the total per recipient in each tax year and can't be used in conjunction with the £3,000 annual exemption. For example, if the total of all gifts made to a single person in a tax year amount to £251, the gift will not qualify for the exemption, even if part of the gift is covered by the annual exemption
- Gifts to help with the living costs of a relative. Perhaps you'd like to contribute to a grandchild's rent or utility bills? This would be IHT-free, but you'd need to keep careful records so that your executor can prove this was a regular gift from surplus income that didn't affect your own standard of living
- Bequests or donations to certain organisations such as charities, sports clubs or universities.
Inheritance tax planning advice from Perrys
Inheritance tax planning is a complex field and it's wise to seek advice from experts before making any decisions that could affect your loved ones in the future. Here at Perrys, we have a dedicated team that can demystify the process and offer in-depth advice in line with the latest legislation.
Please don't hesitate to get in touch to arrange a free initial conversation.