At this time of year, making gifts to others is always at the forefront of our minds. It is also worth considering, however, that the joy of gifting could also improve your inheritance tax position.
For those people with estates in excess of current inheritance tax thresholds, gifting money, houses or valuable personal effects can be a good way of reducing the inheritance tax liability your estate will have at the time of your death. However, it is important to understand how gifts will be treated for inheritance tax purposes. The general rule is that gifts made in the seven years prior to death will still be included in the total value of your estate for calculating inheritance tax on your death.
However, there are a number of exemptions that offer opportunities for inheritance tax mitigation and some of the most common are detailed below:
- Annual exemption – the first £3,000 of gifts in any tax year are exempt from inheritance tax (and a tax year runs from 6th April to the following 5th April). It is possible to carry forward any unused portion of this exemption into next tax year if necessary (so you can have a maximum annual exemption of £6,000);
- Small gifts – gifts of up to £250 to any person in any tax year are exempt from inheritance tax. You can make as many such gifts as you like but no one individual may receive more than £250 in order for this exemption to apply. This exemption would normally cover most Christmas and birthday gifts made to friends and family.
- Gifts in consideration of marriage or civil partnership – gifts made to the bride or groom prior to marriage (assuming that the marriage ultimately takes place) are also exempt up to certain limits. The limits are £5,000 for parents of the bride or groom, £2,500 for grandparents or remoter ancestors or £1,000 for any other person.
- Gifts to charities – all gifts made to charities registered in the UK made during a person’s lifetime (and on death) are exempt for inheritance tax purposes, regardless of value.
- Gifts to political parties, registered housing associations, for ‘national’ purposes or for public benefit – these may also be exempt, depending on the recipient of the gift and the circumstances surrounding the gift.
- Normal expenditure out of income – this has potential to be a very useful exemption for those who receive a large income in their later years. Gifts under this rule are exempt if they are made as ‘normal expenditure’ of the person making the gift; if there is a ‘pattern of gifting’ rather than just a one-off gift; if the gift is truly made from income and not capital; and if the normal standard of living of the person making the gift is not adversely affected. This exemption has to be claimed by the executors after death and is not automatically granted. It is more complex than some of the other available exemptions and therefore professional advice should be sought if you intend to make use of this exemption.
- Spouse exemption – Finally, it may be worth noting that all gifts made to spouses or civil partners, irrespective of value, are exempt for inheritance tax purposes.
If you do wish to make gifts for inheritance tax planning, it is sensible to keep written records of these for evidential purposes and to seek professional advice in order to ensure they are being made in accordance with the inheritance tax rules.
So there is every reason to gift generously this Christmas!
If you would like to discuss gifts or any other aspect of inheritance tax planning, please do not hesitate to contact a member of our Personal Law team on 0131 225 7558.
You can read more about inheritance tax here.
Please note that this information is our understanding of the applicable law as at today’s date and laws change from time to time so you should always take up to date professional advice at the relevant time.