Believe it or not, you are actually allowed to make some gifts without your heirs having to pay any tax at all. Understanding where these boundaries lie however, is generally an area many of us can find confusing. With this in mind, I’ve pulled together a breakdown that whilst comprehensive should be easily digestible!
The law –
You are allowed to make tax free gifts as follows:
Gifts to ‘exempt beneficiaries’:
You can give as much money as you like to certain people and organisations without paying Inheritance Tax (this applies whether you give money whilst living or after you death, via your will). Exempt beneficiaries include:
- Your husband, wife or civil partner, provided they live permanently in the UK
- Charities registered in the UK – to check which charities qualify, visit the HMRC website
- Some national organisations like universities, museums and the National Trust
NOTE that gifts to unmarried partners or unregistered civil partners are not exempt from Inheritance Tax.
Your Annual Exemption:
You are allowed to give away a total of £3,000 each year, without any tax implications after your death. Bear in mind that this is the total annual amount that you can give away, NOT a total amount you can give to each beneficiary, each year.
It is also worth noting that your Annual Exemption can be carried forward for one year if it has not been used. In other words, if you did not make any gifts of money during last year, you can give away a total of £6,000 this year. Equally, if you gave away £1,500 last year, you’ll be able to give away a total of £4,500 this year.
The Annual Exemption cannot be carried forward by more than one year.
Giving small cash gifts:
In addition to the exemptions above, you can give away small gifts – not more than £250 – to as many people as you like in one tax year. However, some points to remember include:
- You can’t make a gift of more than £250, and claim exemption on the first £250 (larger gifts are treated differently)
- You can’t combine the small gifts exemption with another exemption when giving money to one person. In other words, you can’t give one person £3,250 and claim exemption based on a combination of the small gifts and ‘Annual’ exemption.
Provided that you give or promise to give a cash gift on, or shortly before, the ceremony you can make quite large cash gifts as wedding or civil partnership presents, without being liable for Inheritance Tax. The limits on such gifts depend on your relationship with the recipient:
- If you are a parent you can give up to £5,000 tax free
- Grandparents can give up to £2,500
- Anyone else can give up to £1,000
Remember, however, that if the wedding or civil partnership is called off and you still give the gift, it will NOT be exempt from Inheritance Tax.
Regular gifts or payments:
Any gifts that are part of your normal expenditure are exempt – provided they are made from your net, ie. after tax income (not your savings); and that you have enough money left over to maintain your lifestyle. These exempt payments include:
- Maintenance for your husband, wife, civil partner
- Maintenance for your ex-husband, ex-wife or former civil partner
- Maintenance for relatives who depend on you
- Maintenance for your children, adopted children or step-children, as long as they are under 18 or in full-time education
- Monthly or regular payments to anyone
- Regular gifts for Christmas, birthdays or wedding/civil partnership anniversaries
- Premiums on life insurance policies
What if I want to make other/larger gifts? – The ‘Seven Year’ rule
Any gifts you make that do not fall under the scope of those mentioned above will be treated as your asset in decreasing percentages for some time after you have made that gift.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
We’d all rather our loved ones benefitted from the full inheritance we want to leave them, let’s not line the taxman’s pockets with more than we have to. Contact A.R.K on 01438 746977 or email firstname.lastname@example.org for more information.