Being savvy when it comes to inheritance tax (IHT) is a wise move - especially if your estate looks likely to exceed the threshold for an IHT charge. The current threshold is £325,000 per person. Married couples and civil partners are able to pass their estate to their spouse tax-free when they die, which means that a surviving spouse can inherit the full estate of the deceased spouse without having to pay Inheritance Tax (IHT).
Gifts up to the value of £3,000 a year can be given by an individual without any IHT charge. It's also possible to also carry over any unused annual exemption but this can be done for one year only, and it must used within the tax year that immediately follows it.
You can also give as many gifts as you like up to £250 per person, per tax year, as long as you haven't already gifted them within your exemption. Any gifts between spouses/civil partners are exempt from IHT.
Gifts from parents to children in relation to a marriage are exempt of up to a value of £5,000. Grandparents are also able to give tax exempt wedding gifts to their grandchildren or great-grandchildren of up to the value of £2,500. A £1,000 tax-exempt gift amount applies to wedding gifts to an alternative relative or friend.
You can also make a gift to registered charities that are exempt from IHT, as long as the gift becomes the property of the charity or is held for charitable purposes. Under certain conditions gifts made to political parties are also exempt.
The final tax exempt kind of gift available is for those given to help with family maintenance. Examples include gifts given to children aged under 18 or those in full-time education, gifts as a transfer of property upon divorce or those that help towards a dependent's living costs.
These gifts fall into three scategories:
When it comes to PETs, gifts made within three to seven years before a donor's death are taxed using 'taper relief', decreasing in value the longer the period between the gift being made and the donor's death. The IHT rate for three to four years between gifting and death currently stands at 32%; for four to five years it's 24%; for five to six years it's 16%; and between six and seven years it is 8%.
IHT is charged at 40% on death, and 20% on lifetime transfers, where chargeable. For 2019/20, the first £325,000 chargeable to IHT is at 0% - this is called the 'nil-rate band'. An additional Residence Nil-Rate Band (RNRB) is available where an interest in a qualifying residence passes to direct descendants. The amount of relief is £150,000 for 2019/20: this is set to rise to £175,000 for 2020/21.
These are just some of the details around IHT. You may find that there are possibilities for additional savings within your own circumstances when factoring giving gifts into your estate planning. The best thing to do is get in touch with the team at Gibbons Mannington & Phipps for more information and to receive advice that relates to your own situation.
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