With Inheritance Tax (IHT) nil rate bands unchanged for 16 years and currently frozen until 2030, more people are making lifetime gifts to reduce their estate’s IHT bill when they die.
However, anyone making lifetime gifts should be aware of the available IHT exemptions.
Regardless of size, gifts are exempt from IHT if the donor lives for another 7 years. The gift only becomes liable for IHT if the donor dies within 7 years of giving it away.
That said, it’s always prudent to make use of exemptions, especially for older donors.
The most useful ones are the annual exemption, gifts to spouses or civil partners, and gifts from income. Here’s what you should know to help you make the most of your IHT exemptions.
Gifts to a spouse or civil partner
Any gifts given to a spouse or civil partner will be exempt from IHT, as long as they live in the UK.
However, while married couples or those in a civil partnership can exchange as many gifts as they like during their lifetime, this won’t reduce their combined estate value.
If one partner is younger than the other or in better health, it would make sense for them to make family gifts, as they will be IHT-free if the donor survives for 7 years.
Annual exemption for gifts
Each tax year, an individual can give away £3,000 worth of gifts that will be exempt from IHT and won’t be added to their estate value. This can all be gifted to one person, or split between several people.
Any unused annual exemption allowance can be carried over for one tax year – so, if you didn’t use any this year, you could gift up to £6,000 the following tax year.
For example, a couple could use this annual IHT exemption to invest £6,000 a year in a Junior Individual Savings Account (JISA) for a child or grandchild.
Gifts from your income
Given that, in theory, the exemption for gifts from income is unlimited, this is probably the most useful one. However, it’s also the most complicated exemption.
Certain conditions must be met, as exempt gifts must be:
- Made out of income and not capital (income after tax, which becomes capital after 2 years, according to HMRC)
- Part of the donor’s regular expenditure (habitual spending from sufficient income)
- From qualifying surplus income (leaving enough for the donor to maintain their normal standard of living)
For example, a grandparent could use this exemption to pay for a grandchild’s school fees as a gift. However, they couldn’t use it to help with a house deposit, as this gift would be irregular.
Get advice on managing IHT
If you’re thinking about making lifetime gifts to reduce IHT, you should make sure you know the rules, as missteps could cost your estate. A basic guide to how IHT works is available on the government website, which includes details of the different exemptions.
From tax planning and managing IHT liabilities during your lifetime to creating a well-written will for optimised estate management after you pass away, we can help you here at gbac.
Our experienced accountants in Barnsley can assist with lifetime gift accounting, asset appraisals, tax reliefs, and more. Give us a call on 01226 298 298 to speak to our team.
Alternatively, you can email us at info@gbac.co.uk and we’ll be in touch to arrange a consultation.