There is a long list of rules regarding gifting and inheritance tax (IHT), but only 45% of financial gift-givers are aware of these rules and exemptions. Not being aware of these regulations can get you into trouble, so it is best to know something about them.
Each individual can give up to £3000 of financial gifts without having to deal with inheritance taxes. This allowance can be carried over for no more than one year. Further, each individual can gift as much as they like, up to £250 per person, per tax year. Spouses and civil partners can give gifts to each other without taking from their allowance. They can also pass on their unused nil-rate band in the case of death, up to an amount of £325,000.
More familial exemptions exist as well:
- If a child is being considered for marriage, a gift up to £5000 is exempt, so long as the gift is from the child’s parents.
- Wedding gifts up to £2500 are exempt when given to grandchildren or great-grandchildren (£1000 is exempt when the wedding gift is given to a different relative or a friend)
- Gifts given with the purpose of family maintenance are exempt. These gifts may include things like divorce transfers and gifts given to minor children or those in education
Donations to charities are also exempt from taxation, and some political party donations are exempt so long as specific conditions are followed.
Taxation and lifetime gifts
Lifetime gifts come in a variety of forms, and some variances on IHT exist depending on the type. Immediately charged are gift transfers made to a company or trust (excluding a disabled trust).
“Lifetime gifts come in a variety of forms, and some variances on IHT exist depending on the type.”
Potentially Exempt Transfers (PETs) are complex in that it is dependent on the death of the donor. If donor death occurs within 7 years of giving of the gift, then IHT will apply. The exact amount of IHT changes based on the number of years after the gift the donor dies (32% between 3-4 years, 24% between 4-5 years, 16% for 5-6 years, and 8% for 6-7 years).
What is the nil-rate band?
There exists a rate of tax on death (which stands at 40%) and 20% on lifetime gifts. In the 2019-2020 tax annum, the nil-rate band sits at £325,000, where IHT is 0%. This is the band of money where the tax charge is 0%. There is another nil-rate band, the Residence Nil-Rate Band, which exists where interest in a residence passes to descendants. This amount is set at £150,000 but is set to increase in 2020/2021.
This is a complex area of tax code where there are a lot of places to go wrong. In areas like these, it is a good idea to hire a tax consultant so that nothing goes wrong.