Contact Us

Follow Us

How to Reduce Inheritance Tax through Gifts in the UK

The more inheritance you leave behind, the more tax your heirs will have to pay after your death. Save them the trouble by saving on inheritance tax every year. 

You need to make a valuation of your estate to know the amount of inheritance tax your heirs need to pay. The good news is that you can reduce this tax through certain methods. 

One option to save on inheritance tax is through gifts.

Plan Estate to Save Inheritance Tax

When you do estate planning, you will make an assessment of your total assets, money, property, and possessions. Inheritance tax will be calculated on the value of your estate. 

This will also let you assess the ways you may save on inheritance tax.

Save Inheritance Tax through Gifts

Inheritance tax may have to be paid on some gifts after your death depending on

  • The recipient of the gift and their relationship with you.
  • The value of the gift.
  • The time of gifting.

We’ll get into these in detail in this blog but first, look at the basics.

1. What is a gift?

You may give gifts to save on inheritance tax in the form of

  • Household and personal items like jewelry and furniture
  • House and land
  • Stocks and shares
  • Money lost if you sell an asset cheap to a family member

Which gifts are exempt from tax?

Gifts given to spouses and civil partners are exempt from inheritance tax. There is no limit to the gifts they can receive as long as they

  1. Reside in the UK permanently
  2. Are legally married or in civil partnership with you

Gifts given to charities and political parties are exempt from inheritance tax as well.

Annual exemptions

The tax year in the UK is from April 6 to April 5 the next year. Every year you can give away some possessions that would be exempted from inheritance tax.

You can gift £3,000 every tax year to prevent it from being added to the value of your estate.

Any gifts given in the last 7 years from the time of death are considered within this parameter and are exempt from tax.

Weddings and Partnerships

You can give tax-free gifts to someone who is getting married or starting a civil partnership, up to

  • £5,000 to children
  • £2,500 to grandchildren or great-grandchildren
  • £1,000 to another person.

If you want to give more gifts to one person, combine the wedding allowance with others (like the annual exception allowance).

Regular Payments

If you want to make regular payments to someone (rent for children, financial support for the elderly) to help with their living costs, there is no limit. But you need to –

  • Afford these payments after meeting your own monthly living costs
  • Pay from regular monthly income

These regular payments are, of course, tax-free. 

The 7 Year Rule of Saving Inheritance Tax on Gifts in the UK

There is no inheritance tax due on the gifts you have given in the last 7 years from the date of death. 

In case the gift is taxable, it will be taxed depending on the date the gift was given. For example – Gifts are given in the last 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a scale called ‘taper relief.’

The Taper Relief Scale

Years between gift and deathRate of tax on the gift
3 to 4 years32%
4 to 5 years24%
5 to 6 years16%
6 to 7 years8%
7 or more0%

 

The Bottom Line

If you have given more than £325,000 worth of gifts in the last 7 years before your death, all the recipients would need to pay inheritance tax on their gifts. 

Estate planning is tough, but never fear when there are experts to help! You have the option of taking help and getting someone else to do it for you. Enlist the help of trusted estate planning and inheritance tax advisers. We will help you save the maximum on inheritance tax.

 

Leave A Comment