In the last year, Inheritance Tax receipts have risen sharply – soaring from £0.5 billion to £4.1 billion between April and October.
This rate is likely to climb higher and higher due to rising house prices, inflation and the Chancellor’s decision to freeze Inheritance Tax allowances, such as the nil-rate band and residence nil-rate band, until 2028.
None of us wants to pass on a tax burden to our beneficiaries through our estate, but for more and more people it is becoming a reality, in large part due to the rising value of the homes that we own.
While there are many ways to mitigate a potential Inheritance Tax bill, with Christmas just around the year what better time of year than to look at the rules around gifting?
Annual Exempt Gifts
Giving gifts of up to £3,000 will be tax-free under annual exemptions. If you provide a gift of this size or less, it will not be added to the total value of your estate for Inheritance Tax purposes.
If you do not use this allowance in one tax year it can be carried forward to the next tax year, but you cannot continue to roll it over into the following tax year as well.
Certain gifts do not count towards this annual exemption, including gifts of up to £250 or less to any individual unless they have already received a gift of your £3,000 annual exemption.
You can also give a larger wedding gift to a child worth £5,000 or more prior to their nuptials and certain payments to help with a family member’s living costs, such as school fees, may be exempt as well.
The Seven Year Rule
Taper relief or as it is more commonly known, The Seven Year Rule, applies tax to gifts you have made in the seven years prior to your death on a sliding scale.
If there is Inheritance Tax to pay, it is charged at the full 40 per cent on gifts given in the three years before your death. However, the rate of tax paid on gifts made three to seven years before your death is taxed at different rates as follows:
While you cannot usually plan the date of your death, it is important to understand how this mechanism works and plan lifetime gifts accordingly.
Any money or assets that you give to a qualifying charitable body, whether during your lifetime or in your will via a legacy donation, is exempt from Inheritance Tax.
What’s more, if you leave more than 10 per cent of your net estate to a charity after you die the rate at which tax is paid on the rest of your estate is reduced from 40 per cent down to 36 per cent.
Planning for later life should include a clear pension, savings and investment strategy, but ought to also consider your estate after you are gone.
It is highly advised that you seek tax advice if you anticipate paying Inheritance Tax as there is a lot that can be done to reduce the amount that is paid.
If you are concerned about how your gift giving might affect your Will or estate, please speak to our team today.