Your estate may be subject to inheritance tax (IHT) on your death, with less being left to
pass to your loved ones. IHT is charged at 40% on your estate on death, and at 20% in respect of certain chargeable lifetime gifts over your available nil rate band (currently £325,000). By making use of certain lifetime allowances, you could reduce or even eliminate the IHT payable when you die.
Normal expenditure out of income
Lifetime gifts are exempt if they form part of your normal expenditure out of income, provided that you are left with enough income to maintain your usual standard of living (and do not need to dip into capital).
A regular pattern of giving is required, for example, meeting annual school fees for a grandchild, or paying the premiums on a life policy for another’s benefit.
Any number of gifts of up to £250 (to any one individual) during a tax year are exempt. The exemption is only available if the gifts to that individual for the tax year do not exceed £250 in total. For example, if you were to give your niece £200 and your granddaughter £300 during the tax year 2023/2024, only the gift to your niece would be exempt.
Wedding or civil partnership gifts
Lifetime gifts to a couple marrying or entering a civil partnership are exempt, up to certain limits.
The amount of the limit depends on your relationship to the couple:
- Each parent can give £5,000
- Each grandparent or great-grandparent can give £2,500
- Either of the couple can give to each other £2,500
- Any other person can give £1,000.
Lifetime gifts which do not fall into any other exemption are exempt up to £3,000 a year. If you don’t use your whole annual exemption in one tax year, you can carry forward the unused portion to the next tax year.
Potentially exempt transfers
If there are no other exemptions available, an outright gift to an individual (called a “potentially exempt transfer”) might eventually fall out of charge. If you survive for seven years after making the gift, it becomes fully exempt.
If you die within seven years, the gift becomes chargeable and will use up all or part of your nil rate band. If you give away more than the nil rate band amount and survive between three and seven years after the gift, then the IHT payable is reduced.
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