You may be thinking of making a gift as part of your inheritance planning. There are a number of ways in which you can gift money without incurring inheritance tax. However, this depends on why you gift it, who you gift it to, how much you gift and how long you live after gifting the money. The law in this area can be quite complex, but here are a few tips to help you make the right decision.
How Much Can I Gift Each Year?
You are able to gift a total of £3,000 per tax year without incurring inheritance tax. This is £3,000 in total rather than £3,000 per recipient.
This annual exemption can be carried across to the next tax year, if not used for the previous tax year. For example, if you did not gift any money in the 2023/2024 tax year, in the 2024/2025 tax year you may gift £6000 inheritance tax free. However, this can only be transferred through for one year.
On top of this, you can give small cash gifts up to the value of £250 to as many people as you want, as long as they have not received a gift of your whole £3,000 annual exemption.
Can I Gift Tax Exempt Money Exceeding my Annual Exemption?
It is completely up to you how much money you gift while you are alive; however, if you want to make this gift inheritance tax free, it is important that you plan when to gift the money.
If you live more than seven years from when you make the gift, your recipient won’t have to pay inheritance tax when you die. However, if you don’t live for more than seven years, they will be liable for inheritance tax as your gift will then count as part of your estate for inheritance tax.
The amount of the gift will reduce your available inheritance tax allowance (known as the nil rate band) on your death. If you gift more than your nil rate band during your lifetime then towed will depend on when the gift was given – the older the gift, the lower the amount of inheritance tax (this is known as taper relief).
For example, you may gift your child a deposit for a house which may be over your annual exemption of £3,000. They will not be liable for inheritance tax if you live longer than seven years from the date the money was gifted.
There are also certain circumstances where you can gift above your annual exemption without incurring inheritance tax:
1. Wedding gifts: Inheritance tax free money can be given in the form of a wedding gift in certain circumstances. For example, if it is given to a child and is worth £5,000 or less; given to a grandchild or great-grandchild and is worth £2,500 or less; or given to another relative or friend and is worth £1,000 or less.
2. Money to help with living costs: If you are helping an ex-spouse pay living costs, an elderly dependent or a child under 18 or in full-time education, this money will be exempt from inheritance tax, providing you live for more than 7 years after gifting it.
3. Money from a surplus income: If you earn enough income to maintain your normal standard of living, you can make gift payments from your remaining income. For example, paying regular amounts into a child’s savings account.
How Can I Protect Myself for Inheritance Tax?
It is very important that you keep precise records of when you gift money and to whom. Otherwise, inheritance tax could be due on gifts when you die. If you are gifting large amounts of money, for example a deposit for a child’s home, ensure you write and sign a dated letter to prove when the gift was given and how much was given.
It is also important to remember that, once you have made the gift, in order for it to be effective for inheritance tax planning purposes, you cannot continue to benefit from the assets gifted. For instance, if you gift a rental property, you would not be able to continue to receive the rental income.
Learn More About Gifts
Here at Howells we can offer expert advice to help you find the ideal solution to your situation. For more information on money gifts or inheritance tax planning, please contact Howells solicitors and speak to one our experts who will to happy to give you further guidance.
Get in touch with your local branch today – we’re always happy to help.
