HM Revenue & Customs has recently published a report into lifetime gift making and the effect which inheritance tax (and inheritance tax relief) has.
The study identified that approximately one-eighth of the population had given a single gift in excess of £1,000 in the two years preceding the study, while seven per cent reported having given multiple gifts of £250 or more which cumulatively exceeded £3,000. There was a degree of overlap between these groups, but approximately 13% of the sample group in total met the study’s criteria for being ‘gifters’.
Of these gifters, fewer than 45% reported that they were aware of the inheritance tax provisions which affect gifts when they made their largest gift. Of this group, only 18% (or 8% of the total gifters) were influenced by the inheritance tax rules when making their gifts.
Inheritance tax rules
Although it appears that many people are not influenced by the inheritance tax benefits of making gifts, they remain an effective way to pass wealth down the generations. Whether you are motivated by concerns over potential tax bills on death, or simply wish to provide for your family, knowledge of the main exemptions can help your planning for the future.
Where a gift is made to another individual, it is generally treated as being potentially exempt from inheritance tax. The value of the gift will only be taken into account when calculating the inheritance tax due by your estate if you die within seven years of making the gift. There is no limit on this, and you can make substantial gifts which, if you survive by seven years, will not be subject to inheritance tax.
In addition to this, an individual has an annual gift allowance of £3,000. Cumulative gifts up to this amount (which do not benefit from any other relief or exemption) within a tax year are immediately exempt from inheritance tax.
You can also make small gifts totalling up to £250 to any person and these will be immediately free of inheritance tax. These gifts cannot be combined with any other exemption (so, for example, you could not gift somebody £3,250 to combine this with your annual gift allowance) but you can use the exemption to make gifts of £250 to different beneficiaries within the same tax year.
A more generous allowance is available to make wedding gifts. The parents of a party to a marriage can make a gift of up to £5,000 in anticipation of the marriage and the gift will be immediately free of inheritance tax. Remoter ancestors, such as grandparents, can also make immediately exempt wedding gifts of up to £2,500, while anybody can make immediately exempt wedding gifts of £1,000.
It is always sensible to record gifts when they are made. This can be invaluable in establishing when the seven-year time period ends for potentially exempt gifts, and for providing evidence that personal allowances were available at the time the gift was made.
Although your main motivation for making gifts may not necessarily be to reduce a future inheritance tax bill, if you do plan to make gifts then you may wish to consider making them in a tax-efficient manner.
For more information on lifetime gifting or inheritance tax generally, please contact a member of our Tax and Succession team on 0131 228 8111 or at Enquiries.
This note is intended as a brief summary of some of the inheritance tax reliefs which are available, and should not be relied on in place of specialist legal advice. There are other potential tax implications associated with making gifts, and specialist advice should be taken prior to any gifts being made. Turcan Connell would be happy to provide this advice.