You’d be surprised how many people ring us, worried about having to pay Inheritance Tax because their elderly parents want to make them a gift of a sum of money. In reality, most people are very unlikely ever to pay tax on money received or inherited. Beneficiaries who receive an inheritance will normally only pay Inheritance Tax if the donor has given away more than £325,000 within seven years of their death. Most gifts are exempt immediately they’ve been given and those that aren’t will usually be exempt if the giver lives at least seven years after making the gift. No Inheritance Tax is payable on gifts between living spouses or civil partners, so long as the beneficiary lives in the UK permanently.
The standard Inheritance Tax rate is 40% but tax is only charged on the part of the estate that is above the threshold. For most couples, this means they’ll only pay Inheritance Tax if their joint estate is over £650,000 and the addition of the Residential Nil Rate Band makes it possible to pass on a £1m estate free of tax. On death, a home or other property can be passed to a husband, wife or civil partner completely free of Inheritance Tax. It is important to note however that siblings and unmarried partners living together but who are not in formal civil partnerships do not benefit from any equivalent of the spousal exemption. This can cause real hardship where the main asset is a valuable home, risking the survivor being forced to sell their home to pay the tax due.
Exempt Lifetime Gifts
A donor can give away the £3,000 ‘Annual Exemption’ each tax year without it being added to the value of their estate. Any unused annual exemption can be carried forward for one year. Each tax year, you can also give away wedding or civil ceremony gifts of up to £1,000 per person, £2,500 for a grandchild or great-grandchild, £5,000 for a child, payments to help with another person’s living costs, such as an elderly relative or a child under 18, gifts to charities and political parties and any number of small gifts up to £250. You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year. You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person. Note that if you give someone a benefit worth £251 then the whole £251 will be set against the £3,000 annual allowance or else will become a Potentially Exempt Transfer (PET). On its own, £250 is not a lot, but if saved and turned into a capital sum via a savings plan for a grandchild perhaps, say by funding a Junior ISA, then its long-term effect can be far more beneficial. There’s also an exemption for ‘gifts out of income’ so if somebody’s income is much greater than their expenditure, they can legitimately give away some of all of the excess, this preventing their taxable estate growing any larger.
Inheritance Tax is a large and complex subject but hopefully, this article will fix the main misconceptions around gifts. We strongly recommend that you do get personal advice if there is any likelihood of your estate being liable for tax and it’s a concern to you. In simple terms though, if somebody wants to give you money, don’t worry. You are unlikely to have tax to pay, so make the most of it!