Inheritance tax (IHT) is a levy that many people will be hopeful to avoid as it is charged at 40 percent. The tax applies to the value of a person’s estate above a certain threshold when they die.
However, despite the tax hit sometimes being hefty, Britons can find ways to avoid or reduce IHT – and gifting is seen as a good way to do so.
Shona Lowe, financial planning expert at abrdn, said: “Just because something you do counts as a gift for inheritance tax purposes doesn’t necessarily mean you’ll have to pay inheritance tax on it, either at the time the gift is made or when you pass away.
“Whether any inheritance tax is due will depend on the type of gift you make, where the gift goes to, how long you live after making the gift and the overall value of your estate.”
Certain gifts are free from inheritance tax and therefore could be a good way for Britons to utilise the exemption.
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The amount a person gives through these gifts becomes exempt from their estate straightaway.
This includes:
- Anything left to a spouse or civil partner
- Gifts given to political parties or charities
- Gifts of up to £250 – as long as each gift goes to a different person and it is the only exempt gift they have had from the person in that tax year
- A wedding gift – for a child up to £5,000, for a grandchild up to £2500 and for someone else up to £1,000.
Britons are also eligible for an annual exemption when it comes to inheritance tax.
With this exemption, people can give away items of property up to the value of £3,000.
If a person dies within seven years, and there is inheritance tax to pay, the amount due depends on when the gift was given.
Gifts given in the three years before death are taxed at 40 percent.
Gifts given three to seven years before death are taxed on a sliding scale referred to as ‘taper relief’.
Taper relief only applies if the total value of gifts made in the seven years before death is over the £325,000 tax-free threshold.
Taper relief is as follows:
Three to four years – 32 percent
Four to five years – 24 percent
Five to six years – 16 percent
Six to seven years – eight percent
Seven years or more – zero percent.
