Understanding Gifting
Inheritance tax is a crucial consideration when planning your estate, with strategic gifting to help reduce, or even eliminate in certain circumstances, the tax burden for your beneficiaries. By taking advantage of the various exemptions and allowances which are often overlooked, individuals can pass wealth to loved ones while minimising tax liabilities.
What Is Inheritance Tax?
Inheritance tax (‘IHT’) is imposed on an estate when a person passes away. In the UK, for an individual the current basic IHT threshold is £325,000; any assets above this value are generally subject to a 40% tax. Gifting can play a significant role in reducing this tax exposure.
Key Gifting Exemptions and Allowances
1. The 7-Year Rule
- Any gift given outside of the 7-year window before death is completely exempt from IHT. (Care needs to be taken with chargeable transfers and the 14-year rule)
- If the donor passes away within 7 years, the gift may still be taxed, though a sliding scale (taper relief) reduces the rate after 3 years.
2. Annual Exemption (£3,000 per year)
- Individuals can gift £3,000 annually without it being added to their taxable estate.
- If unused, this allowance can be carried forward for one additional year.
3. Small Gift Allowance (£250 per person)
- You can gift £250 per person, per year, tax-free.
- This cannot be combined with the annual £3,000 exemption for the same person.
4. Gifts Between Spouses/Civil Partners
- Unlimited gifts between spouses or civil partners are exempt from IHT, provided both are UK-domiciled.
- This ensures assets can transfer freely without triggering any tax liability.
5. Wedding/Civil Partnership Gifts
- Parents can gift £5,000, grandparents £2,500, and others £1,000 tax-free.
- This applies specifically to gifts made in connection with weddings or civil partnerships.
6. Regular Gifts from Surplus Income
- Gifts given regularly from surplus income (rather than capital) can be exempt, provided they do not affect the donor’s standard of living.
- This is useful for structured financial planning, ensuring a tax-efficient transfer of wealth.
7. Charitable and Political Party Gifts
- Gifts to UK charities or qualifying political parties are completely exempt from inheritance tax.
- Charitable giving can also reduce the IHT rate from 40% to 36%, if at least 10% of the estate is left to charity.
Why Gifting Matters for Estate Planning
Strategic gifting allows individuals to transfer wealth to loved ones tax-efficiently, reducing the size of their taxable estate. It can also help ensure that beneficiaries receive assets sooner, rather than waiting until after death and potentially facing hefty tax bills. By understanding and applying these gifting rules, individuals can preserve more of their wealth for future generations while complying with tax regulations.
To discuss the IHT planning opportunities available to you, do not hesitate to get in touch with the team at Trusted Tax Advice at info@trustedtaxadvice.co.uk or on 07478 263 272.
