They say there are two certainties in life; death and taxes. Inheritance Tax is the dreaded combination of both.
Many are unaware however that inheritance tax can become payable, not only on the gifts made after their death but also on certain gifts made during their lifetime. So, whilst many believe that reducing the size of their Estate during their lifetime will bring about a reduction in the tax payable on their death, this is not necessarily the case.
After your death, the person(s) you left responsible for administering your estate will look at any gifts you made within 7 years prior to your death. These may be monetary gifts, gifts of property or items of value such as jewellery or antiques. Whether inheritance tax will be payable on these gifts will depend upon their value and whether you made any other gifts in the same financial year. In most cases, if you live longer than 7 years after the date of the gift, the recipient will not have to pay inheritance tax. If you live less than 7 years after the gift was made, that gift might be subject to inheritance tax unless one of the following provisions apply;
Gifts falling within your ‘annual exemption’
During your lifetime, you are entitled to an ‘annual exemption’ of £3,000. This is effectively a yearly gift allowance. Inheritance tax will not be charged on gifts made within this annual allowance, regardless of when they are made.
If any part of your annual exemption is not used in one financial year, it can be carried forward to the following tax year. For example, if you have made gifts of £1,000 in the year 2018/19, your total allowance for the year 2019/20 would be £5,000. Please note, you may only carry over one year’s allowance so the maximum allowance for any one year is £6,000.
Other ‘tax-free’ gifts
There are number of lifetime gifts upon which inheritance will not be charged regardless of when they are made, these include;
- Small gifts – these are gifts not exceeding £250 to any one person in any one year. You can make as many of these small gifts as you would like.
- Marriage gifts – each parent of a couple to be wed may gift up to £5,000 in contemplation of the marriage.
- Gifts to charity
- Gifts to a spouse or civil partner domiciled within the UK
If you require further information on inheritance tax or would like to prepare a Will, we at Fisher Jones Greenwood are here to help. Please call 01206 700113 or email [email protected].
Credit – blog post written by Lauren Hancock.