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Upon your passing, Inheritance Tax may be applicable to certain gifts you’ve given during your lifetime.

Gifts offered within 7 years before your demise may be subject to taxation based on the following factors:

The recipient’s identity and their relationship to you.

The value of the gift.

The timing of the gift.

For expert advice on tax-free gifting within your lifetime, you can consult a solicitor or a tax adviser.

Definition of Gifts

Gifts encompass a variety of items, including:

• Monetary transfers
• Personal and household belongings, such as furniture, jewellery, or antiques
• Real estate, such as houses, land, or buildings
• Stocks and shares listed on the London Stock Exchange
• Unlisted shares held for less than 2 years before your demise

Moreover, a gift can also entail a loss incurred when selling an item for less than its market value. For instance, if you sell your property to a family member at a price below its actual worth, the discrepancy becomes a gift.

Note that assets specified in your will are not classified as gifts but are considered part of your estate. Your estate encompasses all your assets, properties, and possessions upon your passing. The value of your estate is used to determine the necessity of paying Inheritance Tax.

Exemptions from Inheritance Tax

Certain gifts are exempt from Inheritance Tax:

Gifts between spouses or civil partners are not subject to Inheritance Tax. You can give unlimited gifts to your spouse or civil partner throughout your life, provided they meet these criteria:

• Permanent residency in the UK
• Legal marriage or civil partnership with you
• Gifts to charitable organizations or political parties are also exempt from Inheritance Tax

Leveraging Allowances for Tax-Free Gifts

Every tax year, you can bestow specific amounts of money or possessions free from Inheritance Tax. The allowable amount for tax-free giving varies depending on the applicable allowances.

Annual Exemption

You can offer up to £3,000 worth of gifts each tax year without adding them to your estate’s value. This is known as your ‘annual exemption.’ The £3,000 allowance can be distributed among multiple recipients or given to a single person.

Unused annual exemption can be carried over to the following tax year, but only for one year. The tax year runs from April 6th to April 5th of the subsequent year.

For example, in the 2021-2022 tax year, A gifted £2,000 to his daughter B If A passed away within 7 years of the gift, this would utilize £2,000 of his annual exemption. In the subsequent 2022-2023 tax year, A bestowed £4,000 to his other daughter C. If A died within 7 years of this gift, his annual exemption of £3,000 would be used, along with the £1,000 of unused annual exemption from the previous year. In either scenario, no Inheritance Tax would be owed.

Small Gift Allowance

You can present unlimited gifts of up to £250 per individual each tax year, as long as you haven’t utilized another allowance for the same person. Gifts given from your regular income for occasions like birthdays or Christmas are exempt from Inheritance Tax.

Gifts for Weddings or Civil Partnerships

In each tax year, you can provide a tax-free gift to someone getting married or entering a civil partnership. The permissible amounts are as follows:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to anyone else

If you’re gifting the same person, you can combine a wedding gift allowance with another allowance, except for the small gift allowance. For instance, you can give your child a wedding gift of £5,000 and concurrently offer £3,000 using your annual exemption in the same tax year.

Regular Payments

You can make ongoing payments to another person, such as aiding their living expenses. There’s no limit on tax-free giving, provided:

• The payments are within your financial means after meeting your regular living expenses.
• The payments originate from your regular monthly income.

Such payments are termed ‘normal expenditure out of income’ and can encompass:

• Rent payments for your child
• Contributions to a savings account for a child under 18
• Financial support to an elderly relative

For the same recipient, you can combine ‘normal expenditure out of income’ with another allowance, except for the small gift allowance. For instance, you can offer your child a monthly payment of £60 (a total of £720 per year) and simultaneously use your £3,000 annual exemption in the same tax year.

The 7-Year Rule

No tax is applicable to gifts you give if you survive for 7 years post-gifting—unless the gift becomes part of a trust. This principle is known as the 7-year rule.

If you pass away within 7 years of gifting and Inheritance Tax applies, the tax amount depends on when the gift was given.

Gifts given within 3 years before your demise are taxed at 40%.

Gifts given between 3 and 7 years before your passing are taxed on a graduated scale called ‘taper relief.’

Taper relief solely applies if the total value of gifts within the 7 years preceding your demise exceeds the £325,000 tax-free threshold.

Taper Relief Rates:

No tax is applicable to gifts you give if you survive for 7 years post-gifting—unless the gift becomes part of a trust. This principle is known as the 7-year rule.

3 to 4 years: 32%

4 to 5 years: 24%

5 to 6 years: 16%

6 to 7 years: 8%

7 or more years: 0%

If you need any assistance in understanding the Inheritance Tax rules of Gifting please consult our Team at info@guradiansolicitors.co.uk or on 0203 301 6600.