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2023... how to gift inheritance tax free
The Law:
Inheritance tax in relation to gifting circulates around the concept of Potential Exempt Transfers (PET for short).
What we are referring to, is that any gift a person makes during their lifetime will be classed PET. These gifts cover any transfer of value, and therefore can be a gift of a specific item or a sum of money.
A PET where the donor does not survive seven years from making the gift, can be subject to an inheritance tax charge. However, there are exemptions and reliefs available to assist in reducing the inheritance tax liability. For further information in relation to this, please see below.
The tax free bands:
Before we can dive into looking at the available exemptions, it is important to note that each individual is entitled to a Nil Rate Band allowance. This allowance is the inheritance tax free amount that your estate can benefit from on death. This allowance is currently set at £325,000 and is fixed until April 2028.
In addition to the Nil Rate Band allowance, where an individual is leaving their property to a direct descendent e.g. child or grandchild, there is also the availability of a Residence Nil Rate Band allowance to be used for a primary residence. This primary residence allowance is currently set at £175,000 and is also fixed until April 2028.
It is useful to note that assets passing between spouses, on the death of a husband or wife, are exempt from inheritance tax. Therefore assets passing between spouses do not use up any of the deceased's Nil Rate Band allowances. Any unused allowance can be transferred to the surviving spouse, to increase the tax free allowance available to the surviving spouse's estate.
How does this link to your gifting?
The value of a PET made within the last seven years before death will be chargeable and therefore considered as part of the deceased's estate, when valuing the estate for inheritance tax purposes. Therefore, a PET will only attract an inheritance tax charge, should the individual's whole estate (including the PET), total a sum above the tax free allowances mentioned above. Please note that taper relief is available for gifts made over three years prior to the death of the donor.
What if an estate is over the Nil Rate Band allowance?
Where the value of an individual's estate is above the tax free allowance available to them, it is important to consider what exemptions are available to the estate to reduce the amount of inheritance tax owed.
The gift exemptions:
There are many exemptions which are potentially available to an estate, but only a few are specific to gifting. These gift related exemptions are discussed below.
The first is the annual exemption, whereby each individual has the ability to gift £3,000 per year, tax free. If unused, this exemption can be rolled over by one tax year only, which potentially gives a maximum £6,000 tax free allowance for that year.
Another useful exemption is the wedding gift exemption. If you are due to dust off your best hat, you may be interested to know that a wedding gift has the potential to be free from inheritance tax, providing the gift is no more than £1,000. If you are the parent of one half of the betrothed couple, you can make a gift £5,000 and a grandparent is able to gift £2,500, tax free.
The third exemption to consider is the small gift exemption, which allows small gifts to be given free from inheritance tax. A small gift for the purpose of this exemption is categorised as being up to the value of £250. This exemption is available providing the total amount gifted to that individual for the relevant tax year, does not exceed the £250 limit. Any gifting over this limit to an individual, would lead to the availability this exemption being lost for the gift receiver, during that tax year.
On the list of gift related exemptions, the fourth and final exemption, is for a gift that forms part of your normal expenditure. Gifts that form part of a pattern of gifting are potentially exempt from inheritance tax, providing they allow the donor to be left with sufficient funds for their usual standard of living. This exemption can likely include the Christmas presents that you have just gifted, providing an annual pattern of gifting can be shown.
Further information:
In addition to the four exemptions discussed above, there are of course a range of reliefs and exemptions which may be applicable, to help mitigate your inheritance tax liability. If you would like further information into the exemptions that may be available to your estate, please do not hesitate get in touch with Chattertons.
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