Inheritance Tax

When someone dies their net estate, valued as at the date of death, will be subject to IHT. Everyone has a Nil Rate Band (NRB) available to their estate of £325,000, this means the first £325,000 of your estate is free of IHT. If you own a property at your death and leave it in your Will to direct descendants (which includes your children, adopted, foster or stepchildren and grandchildren) your estate will also benefit from a Residence Nil Rate Band (RNRB) currently at £175,000. This means the first £500,000 of your estate will not be taxed for IHT, anything you own above £500,000 will be taxed at 40%. If the value of your estate exceeds £2,250,000 you will no longer benefit from the RNRB and will only benefit from the NRB.

IHT Gifting Rules

Annual Exemption

You are allowed to give £3,000 to one person or split between several people in any one tax year. If you did not use your allowance in the previous tax year you can carry this over for one tax year.

Small Gift Allowance

You are also allowed to give as many small gifts of £250 per person as you want in each tax year providing you have not used another allowance on the same person (such as the £3,000 allowance). Any birthday and Christmas gifts you give are exempt from IHT.

Gifts for weddings or civil partnerships

In each tax year you can give a tax free gift to someone who is getting married or starting a civil partnership. This includes £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to any other person. You can combine this allowance with any other allowance except the £250 small gift allowance. 

Normal expenditure out of income

You can make regular payments to help with another person’s living costs. These payments are tax free providing you can afford the payments and you pay them from your regular monthly income. These payments can include paying rent, paying into a saving’s account for someone under the age of 18 or financially supporting an elderly relative. You can combine these gifts with any of the other allowances except the small gift allowance.

The 7 Year Rule

All gifts which you make which do not fall into any of the above categories, such as a gift of more than your annual allowance, are subject to a seven year rule. This means that no tax will be due if you live for 7 years after making the gift.

If you die within seven years of making the gift IHT will be paid on it if your estate exceeds the NRB and RNRB (if applicable to your estate). Depending on when you made the gift your estate may be able to apply Taper Relief which reduces the rate of IHT payable.

• If 1 to 3 years passes from the date of the gift and the date of your death the rate of IHT is 40%.

• If 3 to 4 years passes from the date of the gift and the date of your death the rate of IHT is 32%.

• If 4 to 5 years passes from the date of the gift and the date of your death the rate of IHT is 24%.

• If 5 to 6 years passes from the date of the gift and the date of your death the rate of IHT is 16%.

• If 6 to 7 years passes from the date of the gift and the date of your death the rate of IHT is 8%.

• If 7 years passes from the date of the gift and the date of your death the rate of IHT is 0%

One of the most important aspects of making gifts is that you must ensure that once the gift has been made you no longer receive any benefit from the asset which you gave away. For example, if you gift a holiday rental property you can no longer receive the rental income from that property. If you wish to use the property you must pay full rent for the period of use. Failing to comply with the gift with a reservation of benefit rules will result in the value of the gifted item being added to the value of your estate on your death even though you no longer legally own the asset.

Gifting rules are complicated, and it is therefore important to take legal advice when considering making a gift.